3. Modifying Countertendencies

Introduction

An abstract deductively elaborated theory never
coincides directly with appearances. In this sense the
theory of accumulation and breakdown expounded above does
not directly correspond with the appearances of bourgeois
society in its day to day life. The conditions of
capitalism conceived in its pure form (which we have
analysed so far) and those of the system in its empirical
manifestations (which we have to analyse now) are by no
means identical. This is because a theoretical deduction
involves working with simplifications; many real factors
pertaining to the world of appearances are consciously
excluded from the analysis.

So far we have assumed:

i)
that the capitalist system exists in isolation - that there
is no foreign trade;

ii)
that there are only two classes — capitalists and
workers;

iii)
that there are no landowners, hence no groundrent;

iv)
that commodities exchange without the mediation of
merchants;

v)
that the rate of surplus value is constant and corresponds
to the magnitude of the wage — that is a rate of
surplus value of 100 per cent;

vi)
that there are only two spheres of production, producing
means of production and means of consumption;

vii)
that the rate of growth of population is a constant
magnitude; viii) that the value of labour power is
constant;

viii)
that in all branches of production capital turns over once
a year.

Any theory has to work with such provisional assumptions
which are a potential source of mistakes. But these
assumptions have allowed us to determine the direction in
which the accumulation of capital works, even if the
results of this analysis have a provisional character.

Marx was perfectly conscious of the abstract,
provisional nature of his law of accumulation and
breakdown. Having presented ‘the absolute general
law of capitalist accumulation’, he says that
‘Like all other laws it is modified in its working by
many circumstances, the analysis of which does not concern
us here’ (1954, p. 603). Elsewhere, in describing the
process of accumulation, he writes: ‘This process
would soon bring about the collapse of the capitalist
production were it not for counteracting tendencies’
(1959, p. 246). Marx gave an analysis of these
counteracting tendencies in various places in Capital
Volume Three as well as in Theories of Surplus
Value.

Once we have shown the tendency of accumulation in its
pure form we have to examine the concrete circumstances
under which the accumulation of capital proceeds, in order
to see how far the tendency of the pure law is modified in
its realisation. We are asking whether, and if so in what
direction, the tendencies of development of the pure system
are changed once this system reincorporates, by degrees,
foreign trade, landowners who live off groundrent,
merchants and the middle classes — and once the rate
of surplus value or the level of wages are allowed to vary.
These considerations mean that the abstract analysis comes
closer to the world of real appearances. It enables us to
verify the law of breakdown: to see to what extent the
results of the abstract theoretical analysis are confirmed
by concrete reality.

Considering the gigantic increases in productivity and
the enormous accumulation of capital of the last several
decades the question arises —why has capitalism not
already broken down? This is the problem that interests
Marx:

the same influences which produce a
tendency in the general rate of profit to fall, also call
forth counter-effects, which hamper, retard, and partly
paralyse this fall. The latter do not do away with the law,
but impair its effect. Otherwise, it would not be the fall
of the general rate of profit, but rather its relative
slowness, that would be incomprehensible. Thus, the law
acts only as a tendency. And it is only under certain
circumstances and only after long periods that its effects
become strikingly pronounced. (1959, p. 239)

Once these counteracting influences begin to operate,
the valorisation of capital is reestablished and the
accumulation of capital can resume on an expanded basis. In
this case the breakdown tendency is interrupted and
manifests itself in the form of a temporary crisis. Crisis
is thus a tendency towards breakdown which has been
interrupted and restrained from realising itself
completely.

Return for a moment to the illustration of the cyclical
process of accumulation in Figure 2 above.

Due to the very nature of the accumulation process there
is a basic difference between the two phases of the cycle
with respect to their duration and their character. We have
seen that only the phase of accumulation is defined by a
specific regularity; that only the length of the expansion
phase(O-Z1, O-Z2...) and the timing of the downturn
into a crisis are open to exact calculation. No such
calculation is possible with respect to the duration of the
crisis (Z1-O1, Z2-O2 ... ). At Zl, Z2,
and so
on valorisation collapses. The ensuing overproduction of
commodities is a consequence of imperfect valorisation due
to overaccumulation. The crisis is not caused by
disproportionality between expansion of production and lack
of purchasing power — that is, by a shortage of
consumers. The crisis intervenes because no use is made of
the purchasing power that exists. This is because it does
not pay to expand production any further since the scale of
production makes no difference to the amount of surplus
value now obtainable. So on the one hand purchasing power
remains idle. On the other, the elements of production lie
unsold.

At first only further expansion of production becomes
unprofitable; reproduction on the existing scale is not
affected. But with each cycle of production this changes.
The portion of the surplus value earmarked for accumulation
each year goes unsold. As inventories build up the
capitalist is forced to sell at any price to obtain the
resources to keep the enterprise going on its existing
scale. He is compelled to reduce prices and cut back on his
scale of production. The scale of operations is reduced or
they shut down completely. Many firms declare bankruptcy
and are devalued. Huge amounts of capital are written off
as losses. Unemployment grows.

This sickness leads in one of two directions. Either
there is nothing to stop the breakdown tendency from
working itself out and the economy simply ceases to
function; or specific measures are undertaken to counteract
the sickness so that the sickness is stopped and turns into
a healing process. The question arises: how is a crisis
surmounted? How is a new period of upswing initiated? The
mere statement that crises are a form of sickness is quite
useless if we have no conception of what this sickness is
caused by. The specific means by which a crisis is
surmounted are obviously closely related to the diagnosis
of the sickness. The remedies prescribed would vary
according to whether the underlying cause of crises is seen
as the underconsumption of the masses, as disproportions
between branches of production or as a shortage of
capital.

There are, of course, cases where the boom has been
precipitated by a massive flow of funds from abroad —
for instance, the huge imports of American capital into
Germany over 1926—7. But in numerous instances
—and this is the general rule — crises have
been surmounted without any flow of foreign funds. And just
as crises have been surmounted while many of its so-called
causes (for instance, underconsumption of the masses) are
still present, so we find that all the factors generally
cited to explain the boom turn out to be quite useless in
explaining how the depression itself is overcome. The
remedies proposed are not logically connected with the
diagnosis of industrial sickness.

In contrast to these various theories, our theory shows
that the means actually enforced to surmount a crisis
correspond perfectly to the actual causes of industrial
sickness in our analysis. In this sense the theory provides
a consistent explanation of the two phases of the
industrial cycle, both of the turn from expansion to crisis
and of the process through which the crisis is later
surmounted. From the argument that crises are caused by an
imperfect valorisation of capital it follows that they can
only be overcome if the valorisation of capital is
restored. But this cannot come about by itself, merely in
the course of time. It presupposes a series of
organisational measures. Crises are only surmounted through
such a structural reorganisation of the economy.

The capitalist mechanism is not something left to
itself. It contains within itself living social forces: on
one side the working class, on the other the class of
industrialists. The latter is directly interested in
preserving the existing economic order and tries, in every
conceivable way, to find means of ‘boosting’
the economy, of bringing it back into motion through
restoring profitability.

The circumstances through which the crises can be
overcome vary enormously. Ultimately however, they are all
reducible to the fact that they either reduce the value of
the constant capital or increase the rate of surplus value.
In both cases the valorisation of capital is enhanced
— the rate of profit rises. Such circumstances lie
both within production and in the sphere of circulation,
and pertain both to the inner mechanism of capital as well
as to its external relations to the world market.

The capitalist’s continual efforts to restore
profitability might take the form of reorganising the
mechanism of capital internally (for instance, by cutting
costs of production, or effecting economies in the use of
energy, raw materials and labour power) or of recasting
trade relations on the world market (international cartels,
cheaper sources of raw material supply and so on). This
involves groping attempts at a complete rationalisation of
all spheres of economic life. Many of these measures fall
while the programme of reorganisation is often completely
beyond the reach of the smaller enterprises, which are thus
wiped out. In the end capital finds suitable means of
raising profitability and a reorganisation is gradually
enforced. By its very nature the duration of this
reorganisation and economic restructuring process is
something purely contingent and therefore impossible to
calculate.

In the pages that follow I shall not go into a detailed
description of all the several countertendencies that
hinder the complete working out of the breakdown. I shall
confine myself to presenting only the most important of
them and to showing how the operation of these
countertendencies transforms the breakdown into a temporary
crisis so that the movement of the accumulation process is
not something continuous but takes the form of periodic
cycles. We shall also see how, as these countertendencies
are gradually emasculated, the antagonisms of world
capitalism become progressively sharper and the tendency
towards breakdown increasingly approaches its final form of
an absolute collapse.

Part 1: Countertendencies Internal to the Mechanism of
Capital

Increases in the rate of profit through the expansion
of productivity

In Chapter 2 I outlined the methodological
considerations which prompted Marx to analyse the problem
of accumulation and crisis on the assumption of constant
prices. This assumption made it possible to prove that the
cyclical movements of expansion and decline are independent
of fluctuations in the level of commodity prices and wages.
Here I want to show that the opposite assumption of the
bourgeois economists, who take the price fluctuations as
their starting point, simply confuses the issue.

We have already seen that in analysing the business
cycle Lederer starts from rising prices as the decisive
factor: ‘If we look at periods of boom, then we find
that in such periods all prices rise’ (1925, p. 387).
According to Lederer, expansions in the scale of production
which characterise periods of boom are a result of rising
prices. But how is the general increase in prices possible?
Lederer argues that if the value of money is held constant
a general increase in prices can only flow from changes on
the commodity supply side. ‘However’, Lederer
continues, ‘such changes in the volume of production
are only consequent on changes in the level of
prices’ (p. 388). So Lederer sees a vicious circle
which can only be broken by new purchasing power being
injected into the process of circulation by the expansion
of credit. ‘Only credit creates the boom or makes it
possible’ (p. 391) by raising the level of demand and
therefore of prices. ‘Only through additional credit
and thus newly created purchasing power is any significant
expansion of the productive process possible’ (p.
387).

Lederer’s argument is unconvincing. Apart from its
defective methodological starting point, it is both
logically contradictory and contradicts the actual course
of the boom. Firstly a general increase in prices is
something meaningless apart from the case where the value
of money falls. Yet such a general price increase is purely
nominal - it has no impact on the mass of profit. Bearing
this in mind the whole basis of Lederer’s deductions
simply falls. Secondly the most important renovations and
expansions in the productive apparatus occur in periods of
depression when commodity prices are low. It is the demand
generated by these programmes of expansion that raises the
level of prices, assuming that this demand exceeds the
supply.

In principle rising prices are by no means necessary in
surmounting crises. They are only a consequence, not a
cause, of booms. Extensions in the scale of production can,
and do, occur without rising prices and even if the level
of prices is low. This is basic to any understanding of the
problem. According to Lederer rising prices and the
programmes of expansion supposedly linked to them are a
result of credit expansion. In which case it follows that
credit is released when prices are still low. So Lederer
has to be able to tell us who will take the credit to
extend the scale of production when prices are low? Lederer
is simply running in circles.

The fact remains that programmes of expansion are
undertaken in periods of depression when prices are low.
Any deeper analysis has to start here if we are going to
understand the process in its pure form. At a certain level
of the accumulation of capital there is an overproduction
of capital or a shortage of surplus value. Overproduction
does not mean that there is not enough purchasing power to
buy up commodities, but that it does not pay to buy
commodities for programmes of expansion because it is not
profitable to extend the scale of production: ‘In
times of crisis ... the rate of profit, and with it the
demand for industrial capital has to all extents and
purposes disappeared’ (Marx 1959, p. 513). Due to
lack of profitability, accumulation is interrupted and
production is carried out on the existing scale. Prices are
bound to fall. The fall in prices is only a consequence of
stagnation not its cause.

Because commodities are unsaleable when the crisis
starts, competition sets in. Each individual capital tries
to secure for itself, at the cost of other capitals, that
which is unattainable by the totality of capitals. From a
scientific point of view, this proves that competition is
necessary under capitalism. We started by assuming the most
favourable condition for capital, a state of equilibrium in
which supply and demand coincide. Yet at a certain level of
the accumulation of capital competition must necessarily
arise. Earlier we looked at the capitalist class as a
single entity. But in examining the crisis we must take
account of the mutual competition of the individual
capitalists.

Let us go back to the question posed earlier - how is
the crisis surmounted? How does a renewed expansion of
production come about? The answer is: through the
reorganisation and rationalisation of production by which
profitability is again restored even at the depressed level
of prices prevailing. Figure 4 is a schematic illustration
of the entire movement.

Figure 4

The crisis started at the prices prevailing at level 1.
As a result the price level fell from B to C
until they stabilised at their new and lower level 2 (line
C—D). Taking all the capitals in their
totality, further accumulation was quite pointless on the
prevailing basis. Suppose there are four enterprises, of
equal size but different organic compositions, in a
particular branch of industry:

1) 50c : 50v

2) 40c : 60v

3) 35c : 65v

4) 25c : 75v

-------------

150c :250v

Assume that 150c represent the absolute limit of
accumulation on the existing basis. At this point a crisis
ensues and the companies are forced to reorganise, that is
to rationalise their plants. For example companies 1 and 2
decide to merge so that the organic composition expands,
say in the ratio of 7c: 3v. In the new enterprise
with 90c only 38v (instead of 110) is thus used. Labour
power to the value of 72v is set free; rationalisation
leads to the formation of a reserve army. Once the merger
is complete we have three enterprises as a result of the
concentration process and a reserve army of 72v.

1) 90c: 38v

2) 35c : 65v

3) 25c : 75v

-------------

150c :178v

For the new enterprise resulting from the merger, the
higher organic composition entails a restoration of its
profitability even at the lower price level 2. Firstly
because the higher organic composition of capital means an
increase in the productivity of labour and thus a reduction
in unit costs. Secondly because an increase in the
productivity of labour also means a higher rate of surplus
value. This increase in the rate of surplus value implies
that as the other companies also decide to rationalise the
total surplus value obtainable expands proportionately,
quite irrespective of the fact that every year a new
generation of workers is appearing on the labour market. It
follows that the maximum possible limit to the accumulation
of capital is pushed further back beyond the level
150c.

During the crisis there was overproduction. How was the
upturn produced? Was the scale of operations reduced? On
the contrary, it was expanded even further. And yet the
crisis was surmounted.

That crises are surmounted although the scale of
operations is extended even further is the best proof that
crises do not stem from a lack of purchasing power, a
shortage of consumers, or from disproportions in the
individual spheres of industry. Because the crisis is
rooted in a lack of valorisation it necessarily disappears
once profitability is improved even if prices remain
low.

The empirical evidence for this view confirms it word
for word. Take the example of German shipping where, due to
massive overproduction of tonnage and the ruinously low
freight charges that followed, the biggest shipping
companies incurred consistently heavy losses throughout the
depression years 1892—4. How was this severe crisis
overcome? R Schachner tells us that the depression in
freight charges stimulated important changes in the
technological structure of shipping. In 1894 and 1895,
‘encouraged by low construction costs, all the big
companies went in for the large scale steamer’ (1903,
p. 5). Due to this revolution in shipping
enterprise, world shipping statistics show an increasing
average size of ships: in 1893 the average was 1 418 gross
register tons, in 1894 1 457 grt, in 1895 1 499 grt, in
1896 1 532 grt. The smaller companies could no longer
compete on the freight market with these giant steamers and
were forced to sell off their steamers at enormous losses.
The position of the big shipping companies was entirely
different, despite their intense competition with England.
In 1895 the Hamburg—America line stated in its annual
report: ‘Despite miserable freight charges, our new
steamers were able to operate at a profit due to their
large tonnage and their savings in (fuel) costs’ (p.
7). To overcome the crisis of overproduction of tonnage the
tonnage was expanded even further, despite low prices.

The same process was repeated when, after the boom years
of 1897—1900, a new crisis started in 1901. Again
there was an attempt to relieve the impact of the
depression through a general drive to cut costs in shipping
by expanding the individual scale of operations still
further (Schachner, p. 96). This happened a third time
after the War. In spite of the huge losses due to the War,
world shipping was afflicted by an oversupply of loading
capacity. By 1926 world tonnage had increased by 31.7 per
cent compared to its pre-war level.

Yet world trade had still to recover its pre-war levels,
so it is not surprising that there was a state of severe
depression in the world freight market. Rates declined
steeply to rockbottom levels of profitability. How was this
crisis overcome? Despite the massive oversupply of tonnage,
international shipping converted to the latest type of
vessels with a still larger scale of operations. As against
an average capacity of 1 857 grt in 1914, the figure was 2
136 grt in 1925. Loading capacities increased even more
sharply. Today a modem 8 000 ton steamer with a 10-knot
speed consumes only 30 tons of coal per day. Prior to the
War it consumed 35—6 tons per day. Yet the most
significant technological change, decisive to the whole
question of profitability, was the introduction of a new
type of propulsion. In 1914 mechanised vessels formed just
3.1 per cent of the total world tonnage. By the end of 1924
their share was 37.6 per cent. As against the old coal-run
steamers, the new mechanised ships were characterised by
much higher loading capacities relative to size, by lower
fuel costs and by savings in manpower. For instance on
English vessels, despite a shorter working day, average
crew size declined from 2.58 per grt in 1920 to 2.41 per
grt in 1923.

In short, despite the trough in freight rates, the
technological rationalisation of shipping restored profit
levels and enabled the industry to overcome its crisis.

Because it is so recent, we hardly need to substantiate
the fact that the last great depression following the
German stabilisation of 1924—6 was overcome by the
same methods of rationalisation — by a process of
fusion and concentration, and increases in the productivity
of labour through technological renovations. Profitability
was revived and the crisis surmounted through increases in
productivity and extensions in the scale of production. If
we survey the process in its pure form over a longer period
of several cycles and in abstraction from various
countertendencies, it follows that prices show a declining
tendency from one crisis to the next (in Figure 4, from
level 1 to level 2 and so on), whereas the scale of
production undergoes continuous expansion. In reality the
process does not take this pure form due to the
intervention of various subsidiary factors.

In a given branch of production the crisis is never
overcome purely through the technological improvements
within the branch itself. The capitalists also gain from
the technological and organisational changes accomplished
in other spheres of industry, either because these changes
reduce their investment costs by cheapening basic elements
of the reproductive process or because improvements in
transport or monetary circulation shorten the turnover time
of capital and thus increase the rate of surplus value. The
more a movement of rationalisation spreads and penetrates
into a whole series of new industries, the more the boom
gains in intensity because improvements in one sphere of
industry mean an expanding mass of surplus value in
others.

Reducing the costs of variable capital through
increases in productivity

a) Starting from a dynamic equilibrium the previous
analysis assumed a constant rate of surplus value of 100
per cent throughout the course of accumulation. This
conflicts with reality and has a purely fictitious,
tentative character. It has to be modified.[1] Rising
productivity cheapens
commodities; in so far as this includes commodities that
go into workers’ consumption, the elements of
variable capital are thereby cheapened, the value of
labour power therefore declines and surplus value and
the rate of surplus value increase. Marx says:

hand in hand with the increasing
productivity of labour, goes ... the cheapening of the
labourer, therefore a higher rate of surplus value, even
when the real wages are rising. The latter never rise
proportionally to the productive power of labour. (1954, p.
566)

A further factor in enhancing the rate of surplus value
is the rising intensity of labour that goes together with
general increases in productivity. The increasing degree of
exploitation of labour that flows from the general course
of capitalist production constitutes a factor that weakens
the breakdown tendency.

b) The ‘depression of wages below the value of
labour power’ (Marx, 1959, p. 235) works in the same
direction. Obviously, since the efficiency of work is going
to fall, this can only be a temporary step.

Throughout the analysis we have assumed, in keeping with
the hypothetical state of equilibrium, that the commodity
labour power is fully employed — that there is no
reserve army to begin with and consequently, like all other
commodities, labour power is sold at its value. However I
have shown that even on this assumption, a reserve army of
labour necessarily forms at a certain level of capital
accumulation due to insufficient valorisation. Beyond this
point the mass of the unemployed exert a downward pressure
on the level of wages so that wages fall below the value of
labour power and the rate of surplus value rises. This
forms a further source of increases in valorisation, and so
another means of surmounting the breakdown tendency. The
depression of wages below the value of labour power creates
new sources of accumulation: ‘It ... transforms,
within certain limits, the labourer’s necessary
consumption fund into a fund for the accumulation of
capital’ (Marx, 1954, p. 562).

Once this connection is clear, we have a means of
gauging the complete superficiality of those theoreticians
in the trade unions who argue for wage increases as a means
of surmounting the crisis by expanding the internal market.
As if the capitalist class is mainly interested in selling
its commodities rather than the valorisation of its
capital. The same holds for F Sternberg. He cites the low
wages prevalent in England in the early nineteenth century
as one reason ‘why the crises of this period caused
far deeper convulsions in English capitalism than those of
the late nineteenth century’ (1926, p. 407). Low
wages, and therefore a high rate of surplus value, form one
of the circumstances that mitigate crises.

Shortening the turnover time and its impact on the rate
of surplus value

In the reproduction schemes a period of production lasts
one year and the working period and period of production
are identical. There is no period of circulation and the
working periods follow one another immediately.

The duration of the production period is the same in all
spheres of production and the assumption is made that in
all branches capital turns over once every year. None of
these several assumptions corresponds to reality and they
are intended purely for simplification. First the working
period and production time are not identical in reality.
Secondly, apart from the production time, there must also
be a circulation time. And finally turnover time varies
from one branch of production to another and is determined
by the material nature of the process of production. If the
analysis is to bear any correspondence to the real
appearances those assumptions also have to be modified.

According to Marx the ‘difference in the period of
turnover is in itself of no importance except so far as it
affects the mass of surplus labour appropriated and
realised by the same capital in a given time’ (1959,
p. 152). The impact of turnover on the production of
surplus value can be summarised by saying that during the
period of time required for turnover the whole capital
cannot be deployed productively for the creation of surplus
value. A portion of the capital always lies fallow in the
form of either money capital, commodity capital or
productive capital in stock.

The capital active in the production of surplus value is
always limited by this portion and the mass of surplus
value obtained diminished in proportion. Marx says that the
‘shorter the period of turnover, the smaller this
idle portion of capital as compared with the whole, and the
larger, therefore, the appropriated surplus value, provided
other conditions remain the same’ (1959, p. 70).

The reduction of turnover time means reductions of both
production and circulation time. Increases in the
productivity of labour are the chief means of reducing the
production time. As long as technological advances in
industry do not entail a simultaneous considerable
enlargement of constant capital, the rate of profit will
rise. Meanwhile the ‘chief means of reducing the time
of circulation is improved communications’ (Marx,
1959, p. 71). The technological advances in shipbuilding
mentioned above fall into this category.

The rationalisation of German railways with the
introduction of the automatic pneumatic brake made possible
total savings of around 100 million marks a year, mainly
through reductions in personnel and major changes in the
speed of freight traffic. Once shunting was mechanised so
that trains could be built more quickly and cheaply, and
many lines were electrified, the railway system was
completely revolutionised.

Apart from improvements in transport, savings are
achieved by reducing expenditure on commodity capital.
Before commodities are sold they exist in the sphere of
production in the shape of stock whose storage constitutes
a cost The producer tries to restrict his inventory to the
minimum adequate for his average demand. However this
minimum also depends on the periods that different
commodities need for their reproduction. With improvements
in transport, storage costs can be cut as a proportion of
the total volume of sales transactions. In addition such
costs tend to fall relative to total output as this output
becomes ‘more concentrated socially’ (Marx,
1956, p. 147).

Every crisis precipitates a general attempt at
reorganisation which, among other things, attacks the
existing level of storage costs. The time during which
capital is confined to the form of commodity capital tends
to become progressively shorter. That is, the annual
turnover of capital is speeded up. This is a further means
of surmounting crises. Marx says that:

the scale of reproduction will be
extended or reduced commensurate with the particular speed
with which that capital throws off its commodity form and
assumes that of money, or with the rapidity of the sale
(1956, p. 40).

The additional money capital required for an expanded
scale of production

Many writers argue that the programmes of expansion
characteristic of the boom are impossible without an
additional sum of money; that additional credit creates the
boom or makes it possible. But the capitalist mechanism and
its cyclical fluctuations are governed by quite different
forces. I have already shown that production can be
extended even if the level of prices remains constant or
falls.

Nevertheless assuming a given velocity of circulation of
money, additional money is required to extend the scale of
production. But this is for quite different reasons than
those adduced by supporters of the credit theory. We know
from Marx’s description of the reproduction process
that both the individual and the total social capital must
split into three portions if the process of reproduction is
to have any continuity. Apart from productive and commodity
capital, one portion must stay in circulation in the form
of money capital. The size of this money capital is
historically variable. Even if it grows absolutely it
declines in proportion to the total volume of sales
transactions.

At any given point of time however, it is a given
magnitude which can be calculated according to the law of
circulation. If production is expanded then, other things
being equal, the mass of money capital also has to be
expanded. What is the source of this additional money
capital required for expansions in the scale of
reproduction?

In Chapter 15 of Capital Volume Two Marx
showed
how through the very mechanism of the turnover money
capital is always periodically set free. While one portion
of capital is tied up in production during the working
period another portion is in active circulation. If the
working period were equal to the circulation period the
money flowing back out of circulation would be constantly
redeployed in each successive working period, and vice
versa, so that in this case no part of the capital
successively advanced would be set free. However in all
cases where the circulation period and the working period
are not equal ‘a portion of the total circulating
capital is set free continually and periodically at the
close of each working period’ (Marx, 1956, p. 283).
As the case of equality is only exceptional it follows that
‘for the aggregate social capital, so far as its
circulating part is concerned, the release of capital must
be the rule’ (p. 284). Thus a ‘very
considerable portion of the social circulating capital,
which is turned over several times a year, will therefore
exist in the form of released capital during the annual
turnover cycle which is set free ... the magnitude of this
capital set free will grow with the scale of production the
magnitude of the released capital grows with the volume of
the labour process or with the scale of production’
(p. 284).

Engels thought that Marx had attached ‘unwarranted
importance to a circumstance, which, in my opinion, has
actually little significance. I refer to what he calls the
“release” of money capital’ (1956, p.
288). This assessment of Engels appears to me to be
completely off the mark. Through his analysis Marx did not
merely show that large masses of money capital are
periodically set free through the very mechanism of the
turnover. He also explicitly refers to the fact that due to
the curtailment of the periods of turnover as well as to
technical changes in production and circulation - as we
have seen, carried through chiefly in periods of depression
— a ‘portion of the capital value advanced
becomes superfluous for the operation of the entire process
of social reproduction ... while the scale of production
and prices remain the same’ (p. 287). This
superfluous part ‘enters the money market and forms
an additional portion of the capitals functioning
here’ (p. 287). It follows that after every period of
depression a new disposable capital stands available. This
setting free of a part of the money capital also affects
the valorisation of the total capital; it increases the
rate of profit in the sense that the same surplus value is
calculated on a reduced total capital. The setting free of
a part of the money capital is thus a further means of
surmounting the crisis. Marx thus shows that despite the
assumption of equilibrium:

a plethora of money capital may arise
...
in the sense that a definite portion of the capital value
advanced becomes superfluous for the operation of the
entire process of social reproduction ... and is therefore
eliminated in the form of money capital -. a plethora
brought about by the mere contraction of the period of
turnover, while the scale of production and prices remain
the same. (p. 287)

The reduction in the turnover period generates an
additional mass of money capital which is used to expand
the scale of reproduction further whenever a period of boom
is beginning. Marx has this function in mind when he states
that the ‘money capital thus released by the mere
mechanism of the turnover movement ... must play an
important role as soon as the credit system develops and
must at the same time form one of the latter’s
foundations’ (p. 286).

The conflict between use value and exchange value

Up to now Marxists have drawn attention to the fact that
with the general progress of capital accumulation the value
of constant capital increases absolutely and relative to
variable capital. Yet this phenomenon forms only one side
of the accumulation process; it examines the process from
its value side. However — and this cannot be
emphasised enough — the reproduction process is not
simply a valorisation process; it is also a labour process,
producing not only values but also use values. Considered
from the side of use value, increases in the productivity
of labour represent not merely a devaluation of the
existing capital, but also a quantitative expansion of
useful things.

Earlier I referred to how rising productivity cheapens
the use values consumed by workers and, as a result, raises
the rate of surplus value. Now we shall examine the impact
of increases in the mass of use values, through rising
productivity, on the fund for accumulation. Marx proceeds
from the empirical fact that:

with the development of social
productivity of labour the mass of produced use values, of
which the means of production form a part, grows still
more. And the additional labour, through whose
appropriation this additional wealth can be reconverted
into capital, does not depend on the value, but on the mass
of these means of production (including means of
subsistence), because in the production process the
labourers have nothing to do with the value, but with the
use value, of the means of production. (1959, p. 218)

Increases in productivity that impinge on the material
elements of productive capital, especially fixed capital,
mean a higher profitability for individual capitals. The
same mechanism operates when we look at the process of
reproduction in its totality. Marx writes:

with respect to the total capital ...
the
value of the constant capital does not increase in the same
proportion as its material volume. For instance, the
quantity of cotton worked up by a single European spinner
in a modern factory has grown tremendously compared to the
quantity formerly worked up by a European spinner with a
spinning wheel. Yet the value of the worked up cotton has
not grown in the same proportion as its mass. The same
applies to machinery and other fixed capital ... In
isolated cases the mass of the elements of constant capital
may even increase, while its value remains the same, or
falls. (1959, p. 236)

The expansion in the mass of use values in which a given
sum of value is represented is of great indirect
significance for the valorisation process. With an expanded
mass of the elements of production, even if their value is
the same, more workers can be introduced into the
productive process and in the next cycle of production
these workers will be producing more value. Marx writes
that as a consequence of growing productivity:

More products which may be converted
into
capital, whatever their exchange value, are created with
the same capital and the same labour.

These products may serve to absorb
additional labour, hence also additional surplus labour,
and therefore create additional capital. The amount of
labour which a capital can command does not depend on its
value, but on the mass of raw and auxiliary materials,
machinery and elements of fixed capital and necessities of
life, all of which it comprises, whatever their value may
be. As the mass of the labour employed, and thus of surplus
labour increases, there is also a growth in the value of
the reproduced capital and in the surplus value newly added
to it. (p. 248)

Elsewhere Marx says:

the most important thing for the direct
exploitation of labour itself is not the value of the
employed means of exploitation, be they fixed capital, raw
materials or auxiliary substances. In so far as they serve
as means of absorbing labour, as media in or by which
labour and, hence, surplus labour are materialised, the
exchange value of machinery, buildings, raw materials, etc,
is quite immaterial. What is ultimately essential is, on
the one hand, the quantity of them technically required for
combination with a certain quantity of living labour, and,
on the other, their suitability, ie, not only good
machinery, but also good raw and auxiliary materials.
(1959, pp. 82—3)

With increases in productivity and the mass of use
values, the mass of means of production (and of
subsistence) which can function as means of absorbing
labour expands more rapidly than the value of the
accumulated capital. The means of production can therefore
employ more labour and extort more surplus labour than
would otherwise correspond to the accumulation of value as
such. Marx says that with increases in productivity and a
cheapening of labour power the:

same value in variable capital therefore
sets in movement more labour power, and, therefore, more
labour. The same value in constant capital is embodied in
more means of production, ie, in more instruments of
labour, materials of labour and auxiliary materials; it
therefore also supplies more elements for the production
both of use value and of value, and with these more
absorbers of labour. The value of the additional capital,
therefore, remaining the same or even diminishing,
accelerated accumulation still takes place. Not only does
the scale of reproduction materially extend, but the
production of surplus value increases more rapidly than the
value of the additional capital. (1954, p. 566)

This tendency for the mass of use values to expand runs
parallel with the opposite tendency for constant capital to
increase in relation to variable — and hence for the
number of workers to decline. However these ‘two
elements embraced by the process of accumulation ... are
not to be regarded merely as existing side by side in
repose ... They contain a contradiction which manifests
itself in contradictory tendencies and phenomena. These
antagonistic agencies counteract each other
simultaneously’ (Marx, 1959, pp. 248—9).
‘The accumulation of capital in terms of value is
slowed down by the falling rate of profit, to hasten still
more the accumulation of use values, while this, in its
turn, adds new momentum to accumulation in terms of
value’ (p. 250).

In Table 2.2 we saw that with an increase in working
population of 5 per cent a year and an expansion of
constant capital of 10 per cent, the system would have to
collapse in year 35. But because the mass of
capital
grows more rapidly in use value than in value terms, and
because the employment of living labour depends not on the
value but on the mass of the elements of production, it
follows that to employ the working population at a given
level a much smaller capital would actually suffice than
shown in the table itself. Increases in productivity and
the expansion of use values bound up with them react as if
the accumulation of values were at a lower or more initial
stage. They represent a process of economic rejuvenation.
The life span of accumulation is thus prolonged. But this
only means that the breakdown is postponed, which,
‘again shows that the same influences which tend to
make the rate of profit fall, also moderate the effects of
this tendency’ (p. 236).

It is thus completely inadequate to examine the process
of reproduction purely from the side of value. We can see
what an important role use value plays in this process.
Marx himself always tackled the capitalist mechanism from
both sides — value as well as use value.

The emergence of new spheres of production with a lower
organic composition of capital

Critics have often pointed out that according to
Marx’s prognosis ‘competition rages like a
plague among the capitalists themselves, eliminates them on
a massive scale until eventually only a tiny number of
capitalist magnates survive’ (Oppenheimer, 1927, p.
499). Sternberg repeats the same point. Having portrayed
Marx’s argument in this fashion it is easy to
pronounce that it is not substantiated by the concrete
tendencies of historical development.

But this overlooks the essential point of Marx’s
methodological procedure. Marx’s schemes deliberately
simplify — they show only two spheres of production
within which individual capitals progressively succumb to
concentration. On this assumption the number of capitalists
progressively declines. But the assumption that there are
only two spheres of production is fictitious and it has to
be modified so as to correspond with empirical reality.
Marx shows that there is a continual penetration by capital
into new spheres in which:

portions of the original capitals
disengage themselves and function as new and independent
capitals. Besides other causes, the division of property,
within capitalist families, plays a great part in this.
With the accumulation of capital, therefore, the number of
capitalists grows to a greater or lesser extent (1954, p.
586)

The concentration of capital is thus supplemented by the
opposite tendency of its fragmentation. In this way
‘the increase of each functioning capital is thwarted
by the formation of new and the sub-division of old
capitals (p. 586). Because the minimum amount of capital
required for business in spheres with a higher organic
composition is very high and is growing continuously,
smaller capitals ‘crowd into spheres of production
which Modern Industry has only sporadically or incompletely
got hold of’ (p. 587). These are naturally spheres
with a lower organic composition where a relatively larger
mass of workers is employed.

If a new branch of production comes into being employing
a relatively large mass of living labour — in which
therefore the composition of capital is far below the
average composition which governs the average profit
— a larger mass of surplus value will be produced in
this branch. Marx says that competition ‘can level
this out, only through the raising of the general
level (of profit), because capital on the whole
realises, sets in motion, a greater quantity of unpaid
surplus labour’ (1969, p. 435). Obviously this must
also restrain the breakdown tendency. On the one hand the
lower organic composition of capital raises the rate of
profit, on the other the formation of new spheres of
production makes possible further investment of
capital.

In this way a cyclical movement evolves — the
self-expanding capital searches out new investment
possibilities while new inventions create such
possibilities, new spheres of industry develop suddenly,
superfluous capital is reabsorbed, and gradually there is a
new accumulation of capital which is destined to become
superfluous on an ever larger scale, and so on. This
accounts for the importance of:

new offshoots of capital seeking to find
an independent place for themselves ... as soon as
formation of capital were to fall into the hands of a few
established big capitals, for which the mass of profits
compensates for the falling rate of profit, the vital flame
of production would be altogether extinguished. It would
die out. (Marx,1959, p. 259)

British capitalism is deeply symptomatic of these
processes. While the traditional industrial centres of the
North, of Scotland and Wales have been in a chronic crisis,
a whole series of new industries have begun to spring up in
the South, in the Midlands and in the areas surrounding
London. A report published by the inspector-general of
factories shows that these industries have a much lower
organic composition of capital. For example around London,
apart from a few car-assembly plants, there are factories
producing bandages, minor electrical fittings, bedsteads,
bedspreads, ice-creams, mixed pickles, cardboard boxes and
pencils. Among the few newer industries with a fairly high
organic composition are rayon and automobiles. The latter
involves some 14 500 units, over half of which are repair
shops scattered across the country. According to data
released by the Ministry of Labour (1926) the number of
workers employed in the new industries increased by 14 per
cent in the space of three years (1923—6), while
those employed in the older industries like coalmining and
shipbuilding declined by 7.5 per cent.

Earlier Britain could afford to import small-scale stuff
from the Continent and Japan, whereas now it has to produce
it itself. Even if the development of such industries does
relieve the general impact of the economic depression it
cannot compensate for the catastrophic consequences of the
decline of the older branches which formed the basis of
Britain’s domination. In fact the new industries
employ a total of only 700 000 workers, whereas the
majority are still in the traditional branches like coal,
textiles, shipbuilding and so on.

The struggle to abolish groundrent

A model of pure capitalism where there are only two
classes, capitalists and workers, assumes that agriculture
forms only a branch of industry completely under the sway
of capital. In other words we abstract from the category of
groundrent, from the existence of landlords. But how are
the results of this analysis modified once this assumption
is dropped?

Modern, purely capitalist, groundrent is simply a tax
levied on the profits of capital by the landlord. To the
landlord ‘the land merely represents a certain money
assessment which he collects by virtue of his monopoly from
the industrial capitalist’ (Marx, 1959, p. 618). When
Marx refers to the levelling of surplus value to average
profit he says:

This appropriation and distribution of
surplus value, or surplus product, on the part of capital,
however, has its barrier in landed property. Just as the
operating capitalist pumps surplus labour, and thereby
surplus value and surplus product in the form of profit,
out of the labourer, so the landlord in turn pumps a
portion of this surplus value ... out of the capitalist in
the form of rent. (p. 820)

Rent thus plays a role in depressing the level of the
average rate of profit, it speeds up the breakdown tendency
of capitalism. Spokesmen of capitalism have always been
hostile to groundrent because ‘landed property
differs from other kinds of property in that it appears
superfluous and harmful at a certain stage of development,
even from the point of view of capitalism’ (p. 622).
Ricardo’s writings were directed against the
interests of the landlords and their supporters. The land
reform movements of the latter part of the nineteenth
century sprang fundamentally from the same source.

The struggle to eliminate commercial profit

Commercial profit has the same impact on the breakdown
of capitalism as groundrent Earlier we assumed that
merchant’s capital does not intervene in the
formation of the general rate of profit. Again, this
assumption has a purely methodological value; it has to be
modified. Marx says that ‘in the case of
merchant’s capital we are dealing with a capital
which shares in the profit without participating in its
production. Hence, it is now necessary to supplement our
earlier exposition’ (1959, p. 284). Commercial profit
is a ‘deduction from the profit of industrial
capital. It follows [that] the larger the merchant’s
capital in proportion to the industrial capital, the
smaller the rate of industrial profit, and vice
versa’ (p. 286). Clearly this will intensify and
speed up the breakdown of capitalism.

In periods of crisis this struggle against traders is a
means of improving the conditions of valorisation capital.
In his report on the American crisis, Professor Hirsch has
shown that in America the elimination of large-scale
traders by rural cooperatives in grain, fruit and milk has
assumed massive proportions, with cooperative sales
accounting for as much as 20 per cent of the total sales of
US agricultural produce. The cotton farmers of the north
are likewise engaged in a struggle to eliminate
intermediaries and supply the spinners directly.

This movement acquires its most powerful expression in
the drive by the modem cartels and trusts to increase
profitability by reducing the costs of sales and import
transactions through a centralisation and elimination of
intermediary trade. According to Hilferding its capacity to
wipe out the trader is one of the basic reasons for the
superiority of the combined enterprise. With the rapid
advance of cartelisation in the iron and steel industry,
the significance of commercial capital has declined. There
is a striking tendency to wipe out intermediary trade as
the mining and production stages are integrated vertically
into a single enterprise, so that no profit is diverted to
commercial capital at any single stage of the process. This
is the realisation of Rockefeller’s maxim; ‘pay
a profit to nobody’. Commercial capital is either
left to supplying small customers or forced into a position
of dependence on industrial capital. ‘The development
of large-scale industrial concerns, or the formation of
monopolies’, says T Vogelstein:

has dethroned the princely merchant and
transformed him into a pure agent or stipendiary of the
monopolies ... This world of monopolies is ridding itself
of every vestige of commerce ... By transferring sales
transactions to the syndicates ... the industrial concern
reduces purely commercial activity to a minimum and leaves
this to a few people in the head office or to individual
trading concerns affiliated to itself. (1914, p. 243)

The formation of their own export organisations by the
larger associations and concerns is yet another example of
the tendency to wipe out independent large-scale trade. In
copper a system of trading survives but no longer as an
independent function; the system is intricately connected
with the producers. Dyestuffs and electricals are two
industries with their own sales organisations abroad.
According to the calculations made by E Rosenbaum of
Germany’s total imports in 1926, around 48.3 per cent
were direct, that is, transacted without the mediation of
any trading concerns. In the case of textile raw materials
the figure was 50 per cent and in ores and metals as high
as 90 per cent (1928, pp. 130 and 146).

The squeeze on commercial profit to enhance the average
rate of profit on industrial capital is a product of the
growing barriers to valorisation that arise in the course
of capital accumulation. Therefore as the level of
accumulation advances, the tendency to eliminate commercial
capital intensifies.

However the squeeze on commercial profit is not
tantamount to a cessation of commercial activity. The
latter cannot be done away with under capitalism because
commercial agents fulfil basic functions of industrial
capital in the process of its circulation, namely, its
function of realising values. In this respect they are
simply representatives of the industrial capitalist. Marx
says that:

In the production of commodities,
circulation is just as necessary as production itself, so
that circulation agents are just as much needed as
production agents. The process of reproduction includes
both functions of capital, therefore it includes the
necessity of having representatives of these functions,
either in the person of the capitalist himself or of wage
labourers, his agents. (1956, pp. 129—30)

Despite the tendency for commercial profit to be
eliminated, commercial functions gain in importance as
capitalism develops. This is regardless of whether they are
represented by individual merchants, trade organisations,
cooperatives or industrial trusts and concerns. Prior to
capitalism there was no large-scale commercialisation of
the product of labour: ‘The extent to which products
enter trade and go through the merchants’ hands
depends on the mode of production, and reaches its maximum
in the ultimate development of capitalist production, where
the product is produced solely as a commodity’ (Marx,
1959, p. 325). It follows that the share of commerce in the
overall occupational structure must expand. There is a
growing number of commercial businesses and commercial
employees. A new middle stratum of commercial agents,
commercial employees, secretaries, accountants, cashiers
emerges.

The question arises — what impact does the
existence of this new middle stratum have on the course of
the capitalist reproduction process? Can it reduce the
severity of capitalist crises and weaken the breakdown
tendency, as the reformists have argued ever since
Bernstein? Marx points to the different character of this
middle stratum which arises on the foundations of
capitalist production:

The outlay for these [commercial
wage-workers], although made in the form of wages, differs
from the variable capital laid out in purchasing productive
labour. It increases the outlay of the industrial
capitalist, the mass of the capital to be advanced, without
directly increasing surplus value. Because it is an outlay
for labour employed solely in realising value already
created. Like every other outlay of this kind, it reduces
the rate of profit because the advanced capital increases,
but not the surplus value. (1959, p. 299)

Due to the variable capital expended on these commercial
wage workers, the accumulation fund available for the
employment of more productive workers is reduced.

A part of the variable capital must be
laid out in the purchase of this labour power functioning
only in circulation. This advance of capital creates
neither product nor value. It proportionately reduces the
dimensions in which the advanced capital functions
productively. (Marx, 1956, p. 136)

The rate of valorisation of the total social capital is
thereby diminished and the breakdown tendency intensified,
quite regardless of the fact that these middle strata may
initially consolidate the political domination of capital.
As these middle strata grow the breakdown is speeded up. As
long as the mass of surplus value is growing absolutely
this is not visible. But once there is a lack of
valorisation due to the advance of accumulation this fact
is shown all the more sharply.

The economic function of ‘third
persons’

The term third persons is used by Marx in a double
sense. Sometimes he refers to the independent, small-scale
producers who are remnants of earlier forms of production.
They are not intrinsically connected with capitalism as
such and so must be excluded from any analysis of its inner
nature. We shall see later how far these elements can and
do affect capitalist production through the mediation of
the world market. Secondly Marx understands by third
persons bureaucrats, the professional strata, rent
receivers and so on, who exist on the foundations of
capitalism but do not participate in material production
either directly or indirectly and are therefore
unproductive from the standpoint of such production. They
do not enlarge the mass of actual products but, on the
contrary, reduce it by their consumption, even if they
perform various valuable and necessary services by way of
repayment. The income of these people is not obtained by
virtue of their control of capital, so it is not an income
got without work.

However important these services may be they are not
embodied in products or values. In so far as the performers
of these services consume commodities they depend on those
persons who participate in material production. From the
standpoint of material production their incomes are
derivative. Marx writes:

All members of society not directly
engaged in reproduction, with or without labour, can obtain
their share of the annual commodity product — in
other words, their articles of consumption —
primarily out of the hands of those classes to which the
product first accrues — productive workers,
industrial capitalists and landlords. To that extent their
revenues are materially derived from wages (of the
productive labourers), profit and rent, and appear
therefore as derivative vis-à-vis those primary
revenues. (1956, p. 376)

This group of third persons which was initially excluded
from the analysis of pure capitalism has to be reintroduced
at a later stage. Marx points out that society ‘by no
means consists of only two classes, workers and industrial
capitalists, and ... therefore consumers and producers are
not identical categories’ (1969, p. 493). The:

first category, that of the consumers
...
is much broader than the second category [producers], and
therefore the way in which they spend their revenue, and
the very size of the revenue give rise to very considerable
modifications in the economy and particularly in the
circulation and reproduction process of capital. (p.
493)

What significance does the existence of these people
have for the reproduction and accumulation of capital? In
so far as their material incomes are dependent incomes
— that is, drawn from the capitalists — we are
dealing with groups which are, from the standpoint of
production, pure consumers. As long as this consumption by
third persons is not sustained directly at the cost of the
working class, surplus value or the fund for accumulation
is reduced. Of course these groups perform various services
in return, but the non-material character of such services
makes it impossible for them to be used for the
accumulation of capital. The physical nature of the
commodity is a necessary precondition of its accumulation.
Values enter the circulation of commodities, and thereby
represent an accumulation of capital, only insofar as they
acquire a materialised form.

Because the services of third persons are of a
non-material character, they contribute nothing to the
accumulation of capital. However their consumption reduces
the accumulation fund. The larger this class the greater
the deduction from the fund for accumulation. In Germany in
1925 the services of such groups were valued at six billion
marks, which amounts to 11 per cent of the total national
income. In Britain, where there is a large number of such
persons, the tempo of accumulation will have to be slower.
In America, where their proportion is low, it can be much
more rapid. If the number of these third persons were cut
down, the breakdown of capitalism could be postponed. But
there are several limits to any such process, in the sense
that it would entail a cut in the standard of living of the
wealthier classes.

Expanding the scale of production on the existing
technological: basis: simple accumulation

Along with Bauer we assumed that each year there are
technological changes going on which mean that constant
capital is expanding more rapidly than variable capital.
However production is not always expanded on the basis of a
higher organic composition. Capitalists may expand
production on the existing technological basis for an
extended period of time.

In such cases we are dealing with simple accumulation
where the growth of constant capital proceeds in step with
variable capital — the expansion of capital exerts a
proportional attraction on workers. Of course, the
technological foundations of capitalism are being
constantly improved and the organic composition is always
changing. Nevertheless these changes are ‘continually
interrupted by periods of rest, during which there is a
mere quantitative extension of factories on the existing
technical basis’ (Marx, 1954, p. 423).

As the accumulation of capital advances these periods of
rest become progressively shorter. However to the extent
that such periods of rest occur, they imply a weakening of
the breakdown tendency. Marx writes:

This constant expansion of capital,
hence
also an expansion of production, on the basis of the old
method of production which goes quietly on while new
methods are already being introduced at its side, is
another reason why the rate of profit does not fall as much
as the total capital of society grows. (1959, p. 263)

We shall see that as world market antagonisms intensify,
technological superiority is the sole means of surviving on
the world market. The sharper the struggle on the world
market the greater the compulsion behind technological
changes, so that the intermediate pauses are shortened.
Gradually this counteracting factor becomes less and less
important.

The periodic devaluation of capital on the accumulation
process

The assumption of constant values is one of the many
underlying the reproduction scheme of Marx. Bauer adopts
this assumption in two senses: (i) the value of the
constant capital used up in the process of production is
transferred intact to the product; (ii) the values created
in each cycle of production are accumulated in the next
cycle without undergoing any quantitative changes. (Some
values are of course destroyed in consumption.) This
constancy is postulated although Bauer’s scheme
presupposes continuous technological progress. He does not
notice the contradiction.

Technological progress means that since commodities are
created with a smaller expenditure of labour their value
falls. This is not only true of the newly produced
commodities. The fall in value reacts back on the
commodities that are still on the market but which were
produced under the older methods, involving a greater
expenditure of labour time. These commodities are
devalued.

There is no trace of this phenomenon in Bauer’s
scheme. He refers to devaluations but this is only due to
periodic overproduction. The implication is that if the
system were in equilibrium there would be no devaluations
— the value relations of any given point of time
would survive indefinitely. Things are quite different in
Marx. Devaluation necessarily flows out of the mechanism of
capital even in its ideal or normal course. It is a
necessary consequence of continual improvements in
technology, of the fact that labour time is the measure of
exchange value.

It follows that the assumption of constant values has a
purely provisional character. The question arises —
how is the law of accumulation and breakdown modified in
its workings when the assumption is dropped? Until now this
problem has never been posed. Both Bauer and Tugan realised
that holding values constant is a simplifying assumption.
But neither modified this assumption. For this reason their
models of reproduction are completely unrealistic fictions
which cannot reflect or explain the actual course of
capitalist reproduction.

Devaluation of capital goes hand in hand with the fall
in the rate of profit and is crucial for explaining the
concentration and centralisation of capital that
accompanies this fall.

We have seen how the accumulation process encounters its
ultimate limits in insufficient valorisation. The further
continuation of capital depends on restoring the conditions
of valorisation. These conditions can only be secured if a)
relative surplus value is increased orb) the value of the
constant capital is reduced ‘so that the commodities
which enter either the reproduction of labour-power, or
into the elements of constant capital, are cheapened. Both
imply a depreciation of the existing capital’ (Marx,
1959, p. 248). This depreciation does not come about as a
consequence of overproduction but in the normal course of
capitalist accumulation — as a result of constant
improvements in technology. Advances in technology thus
entail ‘periodical depreciation of existing capital
— one of the means immanent in capitalist production
to check the fall of the rate of profit and hasten
accumulation of capital value through formation of new
capital’ (p. 249).

The result of the devaluation of capital is reflected in
the fact that a given mass of means of production
represents a smaller value. The result is analogous to that
which arises from growing productivity — cheapening
of the elements of production and a faster growth of the
mass of use values as compared with the mass of value.
However in the case of rising productivity the elements of
production actually start off cheaper whereas here we are
dealing with a case where the elements of production
produced at a given value are only subsequently
devalued.

With devaluation the technological composition of
capital remains the same while its value composition
declines. Both before and after devaluation the same
quantity of labour is required to set in motion the same
mass of means of production and to produce the same
quantity of surplus value.

But because the value of the constant capital has
declined this quantity of surplus value is calculated on a
reduced capital value. The rate of valorisation is thereby
increased and so the breakdown is postponed for some time.
In terms of Bauer’s scheme, periodic devaluation of
capital would mean that the accumulated capital represents
a smaller value magnitude than shown by the figures there
and would, for example, only reach the level of year 20 as
late as year 36.

In other words, however much devaluation of capital may
devastate the individual capitalist in periods of crisis,
they are a safety valve for the capitalist class as a
whole. For the system devaluation of capital is a means of
prolonging its life span, of defusing the dangers that
threaten to explode the entire mechanism. The individual is
thus sacrificed in the interest of the species.

The devaluation of accumulated capital takes various
forms. Initially Marx deals with the case of periodic
devaluation due to technological changes. In this case the
value of the existing capital is diminished while the mass
of production remains the same. The same effect however, is
produced when the apparatus of reproduction is used up or
destroyed in terms of value as well as use value through
wars, revolutions, habitual use without simultaneous
reproduction, etc. For a given economy the effect of
capital devaluation is the same as if the accumulation of
capital were to find itself at a lower stage of
development. In this sense it creates a greater scope for
the accumulation of capital.

The specific function of wars in the capitalist
mechanism is only explicable in these terms. Far from being
an obstacle to the development of capitalism or a factor
which accelerates the breakdown, as Kautsky and other
Marxists have supposed, the destructions and devaluations
of war are a means of warding off the imminent collapse, of
creating a breathing space for the accumulation of capital.
For example it cost Britain £23.5 million to suppress
the Indian uprising of 1857—8 and another £77.5
million to fight the Crimean War. These capital losses
relieved the overtense situation of British capitalism and
opened up new room for her expansion. This is even more
true of the capital losses and devaluations to follow in
the aftermath of the 1914—18 war. According to W
Woytinsky, ‘around 35 per cent of the wealth of
mankind was destroyed and squandered in the four
years’ (1925, pp. 197—8). Because the
population of the major European countries simultaneously
expanded, despite war losses, a larger valorisation base
confronted a reduced capital, and this created new scope
for accumulation.

Kautsky was completely wrong to have supposed that the
catastrophe of the world war would inevitably lead to the
breakdown of capitalism and then, when no such thing
happened, to have gone on to deny the inevitability of the
breakdown as such. From the Marxist theory of accumulation
it follows that war and the destruction of capital values
bound up with it weaken the breakdown and necessarily
provide a new impetus to the accumulation of capital.
Luxemburg’s conception is equally wrong: ‘From
the purely economic point of view, militarism is a
pre-eminent means for the realisation of surplus-value; it
is in itself a sphere of accumulation’ (1968, p.
454).

This is how things may appear from the standpoint of
individual capital as military supplies have always been
the occasion for rapid enrichment. But from the standpoint
of the total capital, militarism is a sphere of
unproductive consumption. Instead of being saved, values
are pulverised. Far from being a sphere of accumulation,
militarism slows down accumulation. By means of indirect
taxation a major share of the income of the working class
which might have gone into the hands of the capitalists as
surplus value is seized by the state and spent mainly for
unproductive purposes.

The expansion of share capital

Among the factors that counteract the breakdown Marx
includes the fact that a progressively larger part of
social capital takes the form of share capital:

these capitals, although invested in
large productive enterprises, yield only large or small
amounts of interest, so-called dividends, once costs have
been deducted ... These do not therefore go into levelling
the rate of profit, because they yield a lower than average
rate of profit. If they did enter into it, the general rate
of profit would fall much lower. (1959, p. 240)

In the scheme, where the entire capitalist class is
treated as a single entity, the social surplus value is
divided among the portions a~ and a~
required
for accumulation, and k which is available to the
capitalists as consumption. Now suppose there were
capitalists (owners of shares, bonds, debentures, etc.) who
did not consume the whole of k, but generally only a
smaller portion of it, then the amount remaining for
accumulation would be larger than the sum a~ +
a~. This could then form a reserve fund for the
purposes of accumulation, which would make it possible for
accumulation to last longer than is the case in the scheme.
The fact that many strata of capitalists are confined
strictly to this normal interest, or dividend, is thus one
of the reasons why the breakdown tendency operates with
less force. This is also the basic reason why Germany,
following the example of Britain where this happened much
earlier, has seen a sharp increase in the bonds of the
industrial societies.

The accumulation of capital and the problem of
population

Bauer argued that crises only stem from a temporary
discrepancy between the scale of the productive apparatus
and increases in population. The crisis automatically
adjusts the scale of production to the size of population
and is then overcome. Luxemburg produced a brilliant
refutation of this harmonist theory (1972, pp.
107—39). She showed that in the decades prior to the
War the tempo of accumulation was more rapid than the slow
rate at which the population increased in various
countries. Bauer’s observation that ‘under
capitalism there is a tendency for the accumulation of
capital to adjust to the growth of population’ (1913,
p. 871) is thus incompatible with the facts. In the fifty
years from 1870 to 1920, the US population increased by
around 172 per cent, while the accumulation of capital in
industry expanded by more than 2 600 per cent.

However Luxemburg’s critique, which is perfectly
valid against Bauer, makes the basic mistake of seeing
population only as a market for capitalist commodities:
‘It is obvious that the annual increase of
‘mankind’ is relevant for capitalism only to
the extent that mankind consumes capitalist
commodities’ (1972, p. 111). She sees in population a
limit to the accumulation of capital in the sense that it
cannot provide a sufficient market for those
commodities.

My own view is diametrically opposed to both
Bauer’s and Luxemburg’s. Against Bauer, and
using his own reproduction scheme, I have shown that from a
certain stage — despite increases in population
— an overaccumulation of capital results from the
very essence of capital accumulation. Accumulation
proceeds, and must proceed, faster than population grows so
that the valorisation base grows progressively smaller in
relation to the rapidly accumulating capital and finally
dries up. From this it follows that if capital succeeds in
enlarging the valorisation base, or the number of workers
employed, there will be a larger mass of obtainable surplus
value — a factor which will weaken the breakdown
tendency. Therefore there is a perfectly comprehensible
tendency for capital to employ the maximum possible number
of workers. This does not in the least contradict the other
tendency of capital of ‘employing as little labour as
possible in proportion to the invested capital’
(Marx, 1959, p. 232). This is because the mass of surplus
value depends not merely on the number of labourers
employed — at a given rate of surplus value —
but on raising the rate of surplus value through increases
in the amount of means of production relative to living
labour applied in the production process.

From this it follows that with ‘a sufficient
accumulation of capital, the production of surplus value is
only limited by the labouring population if the rate of
surplus value ... is given’ (Marx, 1959, p. 243).
Therefore population does form a limit on accumulation, but
not in the sense intended by Luxemburg. If population
expands the interval prior to absolute overaccumulation is
correspondingly longer. This is what Marx means when he
writes:

If accumulation is to be a steady,
continuous process, then this absolute growth in population
- although it may be decreasing in relation to the capital
employed — is a necessary condition. An increasing
population appears to be the basis of accumulation as a
continuous process (1969, p. 477).

The tendency to employ the largest possible number of
productive workers is already contained in the very concept
of capital as a production of surplus value and surplus
labour.

Oppenheimer’s criticism, that Marx was forced to
admit that despite the overall displacement of workers
their total number grows, is really unfounded and
meaningless. Capital accumulation is only possible if it
succeeds in creating an expanded valorisation base for the
growing capital. For example at the low degree of
accumulation which survived in Germany up to the end of the
1880s the nascent large-scale industry failed to absorb the
entire working population. Emigration became necessary to
contain this situation. In the decade 1871—80 some
622 914 persons emigrated abroad from the country. In the
following decade this number rose to 1 342 423. But with
the rapid upsurge of industrialisation and the accelerated
tempo of accumulation in the 1890s, emigration ceased and
even gave way to immigration from Poland and Italy into the
industrial areas of the West. The absorption of these
additional labour powers provided the basis for producing
the surplus value required for the valorisation of the
expanded capital.

Natural increases in urban population and migration from
the countryside were insufficient. This was the case
despite continuous intensification of labour which meant
that the mass of exploited labour was growing faster than
the number of exploited workers. A shortage of labour power
persisted despite the recruitment of new workers and the
reabsorption of workers displaced by the increasing
mechanisation of work processes and rising organic
composition of capital. After the 1907 crisis capital was
compelled to seek out an expanded valorisation base by
intensifying the incorporation of women workers. This had
the additional advantage of being cheaper. In a penetrating
account of the German economy A Feiler tells us:

It became increasingly clear that the
rapid expansion of female labour which had characterised
the depression years of 1908 and 1909 was not some passing
phenomenon that would vanish once the rate of employment
restabilised. It survived the depression years into the
boom. The number of women workers continued to rise. In the
five years from 1905 to 1910... the number increased by 33
per cent. This trend intensified in the years that
followed. The number of women employed in factories and
offices increased much more rapidly than the number of men.
This was a revolution pure and simple ... At the end of
1913 there were as many employed women in Germany as
employed men. (1914, p. 86)

However, not much more can be drawn out of the
disposable mass of labour power. Children and old people
cannot be inducted into the production process. The
reservoir of human labour is running dry. If there is a
declining inflow of labour into production the source of
additional surplus value is restricted. This means an
intensified struggle on the world market in search of the
sources of additional surplus value required for the
valorisation of the expanded capital.

But even in countries where population is expanding the
danger of overaccumulation is inherent. Given a rising
organic composition of capital, every increase in the
number of workers implies only a temporary weakening of the
breakdown, not its final overcoming. Because constant
capital expands much more rapidly than population it
follows that after a more or less long period of
accumulation a point must come at which the given
population is not enough to valorise the swollen mass of
capital. At this point capital begins to press against the
extreme boundary of valorisation. Population begins to form
the limit to the accumulation of capital not because the
consumption base of capital is too narrow but because the
valorisation base is insufficient. As a result of
insufficient valorisation a reserve army is created and
there is chronic unemployment. Yet this unemployment has
nothing to do with the introduction of machinery: it flows
from the accumulation of capital. A working population
which is scarce generates a working population which is
surplus.

It is not difficult to see why the question of
population should have changed so rapidly since
Malthus’ time. The slow tempo of accumulation
characteristic of early capitalism generated a concern
about overpopulation and its attendant misery. Today
bourgeois writers in both France and Germany are concerned
about whether the future accumulation of capital will find
adequate reserves of labour power at its disposal. The
modern bourgeois economist is characterised by his dread of
underpopulation.

It might be argued that the threat is not too serious
because there are still hundreds of millions of people in
the enormous continents of Asia and Africa who could
satisfy capital’s insatiable appetite for labour. But
the point is not whether there are large masses of people
in this or that part of the world, but whether they are
available where capitalism needs them. If we look at the
matter this way then colonial capitalism and imperialism
are characterised by a shortage of labour power. It would
be superfluous to go into all the evidence available from
various parts of the world. I shall only take a few
examples.

Australia is not important as a market for the advanced
capitalist economies. Australia’s significance lies
in its production. Next to Argentina, Australia is the
world’s most important producer of wool. Broken Hill
District alone supplies around 20 per cent of the
world’s total production of zinc. The copper mines of
Mount Morgan are among the world’s largest. The
immigration of cheap labour power has therefore always
played an important role in the various colonisation
projects relating to Australia, starting with the famous
system devised by Wakefield who established his own
companies in Adelaide, South Australia (1836) and
Wellington in New Zealand (1839) by importing impoverished
immigrant workers whose fares were paid by him.

This drive for labour power has persisted. According to
W Pember-Reeves Australia’s production could be
increased significantly if coloured workers were allowed
jobs on the sugar plantations of Queensland (1902, Chapter
4). However capital ran up against the opposition of white
workers to the immigration of coloured workers. W Dressler
tries to counter this fear of competition from immigrant
labour by saying that in the long run the white workers
would leave the unhealthy jobs to immigrant workers and
would have to take on supervisory functions (1915, pp.
188—9). As recently as 1925 we hear that ‘in
Australia there is an absolute shortage of labour
power’ (F Hess, 1925, p. 138).

The picture is the same in all the colonial countries.
It is true of the South African mines, the cocoa
plantations of San Tome, the copper districts of Katanga,
the cotton fields of French Cameroon and Equatorial Africa,
the sugar plantations of the Dominican Republic and Guyana,
the rubber plantations of Sumatra and Borneo. ‘In
large parts of Africa’, according to a report in the
Berliner Borsen Courier [Berlin Stock Exchange
Courier], the black population ... is being pushed back
into increasingly smaller reservations ... in Kenya around
five million acres have been reserved for settlement by
whites.’ In this way ‘increasingly greater
masses of blacks are compelled to sell their labour power
to European entrepreneurs at starvation wages’ (6 May
1928). In Sumatra and Borneo whatever little labour there
is prefers to work on the rubber plantations of the native
peasantry than on the large-scale plantations owned by the
big European capitalists, who literally treat them like
animals.

When Marx described the gruesome exploitation of the
British working class in Capital bourgeois
economists called it a ‘one-sided’ picture and
tried their best to show that the conditions described were
characteristic only of the early stages of industrial
development, and were bound to be superseded by the gradual
progress of social reforms. Yet Marx’s description of
the conditions of the British working class of the early
nineteenth century was an empirical illustration of
tendencies which Marx had established through a theoretical
analysis of the nature of capital.

Restrained in its wolf-like hunger for labour at home,
West European capital celebrates even more unbridled orgies
of exploitation in the territories recently opened up to
capitalist production. The shameless character of
capital’s exploitation of the labour of women and
children is repeated here on an enormously magnified scale.
And the immense squandering of human life that follows only
intensifies the shortage of labour.

Part 2: Restoring Profitability through World Market
Domination

Introduction: The economic function of imperialism

Among the several simplifying assumptions which underlie
Marx’s analysis of the reproduction process is the
assumption that the capitalist mechanism is an isolated
entity without any external relationships: ‘The
involvement of foreign commerce in analysing the annually
reproduced value of products can ... only confuse without
contributing any new element of the problem, or of its
solution. For this reason it must be entirely
discarded’ (Marx, 1956, p. 474).

Yet Marx himself repeatedly underlined the colossal
importance of foreign trade to the development of
capitalism; in 1859 he proposed a six-book structure for
his investigations of the capitalist economy and intended
the ‘world market’ to be one of the six.
Although the structure of the work was later changed, its
object of inquiry remained basically the same. In
Capital we find the ‘creation of the world
market’ listed as one of the ‘three cardinal
facts of capitalist production’ (1956, p. 266).
Elsewhere Marx writes: ‘Capitalist production does
not exist at all without foreign commerce’ (1956, p.
474). And:

it is only foreign trade, the
development
of the market to a world market, which causes money to
develop into world money and abstract labour into
social labour ... Capitalist production rests on the
value or the transformation of the labour embodied
in the products into social labour. But this is only
[possible] on the basis of foreign trade and of the world
market. This is at once the precondition and the result of
capitalist production. (Marx, 1972, p. 253)

So what scientific value can there be in a theoretical
system which abstracts from the decisively important factor
of foreign trade?

People have tried to escape the problem by postulating a
gap in Marx’s system; they have argued that after all
Capital is an unfinished work. Thus A Parvus argues
that the founders of scientific socialism ‘died much
too early’ (1901, p. 587) to leave us any analysis of
trade policy. Recently A Meusel has argued that Marx was
naturally less interested in problems of foreign trade
because the only significant foreign trade controversy
which he lived to see, the struggle for the abolition of
the Corn Laws, appeared to be a conflict between the landed
aristocracy and the industrial middle class; ‘it was
easy to suppose that the working class had no immediate
strong interests of its own in policies relating to foreign
trade’ (Meusel, 1928, p. 79). This distortion
explains why Meusel cannot grasp the tremendous importance
of foreign trade in Marx’s work, even though this is
repeatedly and emphatically drawn out in Capital
and
Theories of Surplus Value. Luxemburg also starts
from the conception that Marx ignored foreign trade in his
system, that ‘he himself explicitly states time and
again that he aims at presenting the process of
accumulation of the aggregate capital in a society
consisting solely of capitalists and workers’ (1968,
pp. 330—1). Luxemburg could only explain this by
postulating a gap in Marx’s work, supposedly due to
the fact that ‘this second volume [of Capital]
is not a finished whole but a manuscript that stops short
half way through’ (pp. 165-6). Luxemburg then
constructs a theory to fill in the so-called gap. This may
be a convenient way of disposing of theoretical problems
but it shatters the underlying unity of the system and
creates a hundred new problems.[2]

What Luxemburg sees as a gap in Marx’s system is
transformed by Sternberg into its basic limitation. Marx
turns out to be a builder of completely abstract systems
which were bound to lead to untenable conclusions insofar
as they ignored the basic aspects of reality. He says that
‘Marx analysed capitalism on an assumption that has
never corresponded with reality, namely that there is no
non-capitalist sector’ (1926, p. 303). Whereas
Luxemburg at least regarded Marx’s whole system as a
solid achievement of theory, Sternberg informs us that the
whole system is a delapidated structure. He states that
Luxemburg ‘broke off too soon’ in her
demolition of Marx’s system. She ‘failed to see
that every stone of the structure is affected by the fact
of the existence of a non-capitalist sector, not only the
accumulation of capital but crisis, the industrial reserve
army, wages, the workers’ movement and, above all,
the revolution’ (p. 9). So all these basic questions
of Marxist theory are tackled incorrectly because Marx
built his system on the unproven and improbable assumption
that there are no non-capitalist countries.

The grotesque character of this entire exposition is
obvious. It is the product of a whole generation of
theoreticians who go straight for results without any
philosophical background, without bothering to ask by what
methodological means were those results established and
what significance do they contain within the total
structure of the system. Sternberg writes a book of over
600 pages simply to register the observation that Marx
described only pure capitalism, isolated from external
trade relations. Because Marx never ordered the various
passages dealing with foreign trade under capitalism into a
single, structured chapter, these passages are totally
ignored. This is a sad proof of the decline of the capacity
to think theoretically.

The function of foreign trade under capitalism

The importance of foreign trade for the increasing
multiplicity of use values

The progress of capitalism increases the mass of surplus
product accruing to capital. The number of human needs is
unlimited and when people have enough of some products
there are always others which they can use. Towards the
middle of the last century people consumed a greater
variety of products than fifty years earlier, and today
this variety is greater still.

Foreign trade plays an important role in expanding this
multiplicity of products. Here what matters is
international exchange as such, regardless of whether it
takes place with capitalist or non-capitalist ones. By
increasing the multiplicity of products foreign trade has
the same impact as product diversification on the home
market. An increasing variety of use values facilitates
accumulation and weakens the breakdown tendency. Marx
says:

If surplus labour or surplus value were
represented only in the national surplus product, then the
increase of value for the sake of value and therefore the
exaction of surplus labour would be restricted by the
limited, narrow circle of use values in which the value of
the [national] labour would be represented. But it is
foreign trade which develops its [the surplus
product’s] real nature by developing the labour
embodied in it as social labour which manifests itself in
an unlimited range of different use values, and this in
fact gives meaning to abstract wealth. (1972, p. 253)

Thus the limits on the production of surplus value are
extended; the breakdown of capitalism is postponed.

This aspect of the exchange relationship does not
exhaust the problem of foreign trade and its impact on the
tendencies of capitalism. Looking at the matter from the
value side, I have shown that the problem of breakdown by
no means lies in an excess of surplus value but in its
opposite, a lack of sufficient valorisation. Therefore we
have to examine foreign trade from the aspect of its impact
on valorisation.

Expansion of the market as a means of reducing the
costs of production and circulation

To understand why foreign trade and market expansion are
important we do not need to fall back on the metaphysical
theory of the realisation of the surplus value. Their
importance is more obvious. Hilferding argues:

the size of the economic territory ...
has always been extremely important for the development of
capitalist production. The larger and more populous the
economic territory, the larger the individual plant can be,
the lower the costs of production, and the greater the
degree of specialisation within the plant, which also
reduces costs of production. The larger the economic
territory, the more easily can industry be located where
the natural conditions are most favourable and the
productivity of labour its highest. The more extensive the
territory, the more diversified is production and the more
probable it is that the various branches of production will
complement one another and that transport costs on imports
from abroad will be saved. (1981, p. 311)

Due to mass production British industry, which was the
workshop of the world down to the 1870s, could carry
through a division of labour, increases in productivity and
cost savings to a level that was unattainable elsewhere.
Whereas weaving and spinning were originally combined,
later they were separated. This resulted in geographical
specialisation. Burnley made the traditional calico prints,
Blackburn clothed India and China, Preston manufactured
fine cottons. The factory districts lying close to
Manchester concentrated on more complicated fabrics, like
the cotton velvets of Oldham and high quality calicoes of
Ashton and Glossop. Only mass production of this kind made
possible the construction of specialised machines for
individual operations, and this meant important savings in
investment and enterprise costs.

Manchester, previously the centre of the industry, more
and more specialised as the exclusive base of the export
trade. In the basements of the city’s commercial
firms, which were often several stories underground, steam
engines and hydraulic presses were reducing cotton yams and
fabrics to half their thickness.

Such a high level of production specialisation meant
huge cost reductions due to savings in non-productive
expenses, reduced work interruptions and increases in
productivity and the intensity of labour. Economies in
production are supplemented by economies in the sphere of
circulation. The number of importers, brokers and so on is
compressed to the absolute minimum. An intricate system of
transport connects supply bases to centres of production.
Special credit organisations emerge with their own terms of
payment. All of this enhances valorisation by reducing the
costs of investment, manufacturing and marketing. This is
what accounted for the competitive superiority of British
capitalism.

The compulsion to produce the greatest possible surplus
value is enough to account for the enormous importance of
market expansion and struggles for markets. We do not need
to fall back on Luxemburg’s notion of the necessity
of non-capitalist markets for realising surplus value. In
fact it is irrelevant whether the markets in question are
capitalist or not., What matters is mass outlets, mass
production and the specialisation and rationalisation of
work and circulation which mass production makes possible.
It makes no difference whether German chemicals are
exported to Britain or to China.

Finally the specialisation and geographical
concentration of production in specific lines contributes
to the training of a highly efficient workforce, and
therefore to increases in the skill and intensity of
labour. A German worker cited by Schulze-Gaevernitz talks
of German workers being less efficient than British workers
due to lack of tradition, in the sense that in Britain
workers have acquired a basic experience in handling
machinery through specialised work lasting over
generations. The result is that in Britain three or four
workers can operate 1 000 spindles whereas in Germany at
that time it needed six to ten (1892, p. 109).

We should add that France for example, which possesses
an old and flourishing silk industry at Lyons, remained
totally dependent on Britain for her imports of raw silk
from China and Japan. All attempts to procure Chinese silk
directly, with the help of French banks, failed because
Britain was able to buy the silk more cheaply due to her
extensive trade connections and lower freight costs. In
addition despite the double freight costs involved in
importing the raw material all the way from Australia and
shipping the final product back there, British woollens
remain cheaper and more competitive than Australian
woollens because the size of the Australian market forces
the individual units there to diversify instead of
specialising. Domestic prices are higher than world market
prices, sales are confined exclusively to the home market
and this means that protection is necessary. The same holds
for the woollen industries of La Plata (Argentina) and
South Africa, although wool is directly available there and
this dispenses with double transport costs.

All this explains why the USA has emerged as an
increasingly more dangerous competitor on the world market.
The enormous advantages of a large and integrated scale of
operations, in territorial terms, gives American industry
completely different possibilities of expansion than those
available in Europe.

Mass production and mass sales have always been basic
objectives of capitalist production. But they have become
matters of life and death for capitalism only in the late
stage of capital accumulation when a purely domestic
valorisation of the gigantic mass of capital becomes more
and more difficult. Mass production is necessary to obtain
the various advantages of specialisation which are
inseparable from mass production. It is also necessary for
achieving a level of competitive superiority on the world
market. Politically mass production means the triumphant
domination of the large-scale enterprise over the small and
medium enterprises. It explains the tendency to form
transnational empires in place of the nation state. The
categories in terms of which we think today are no longer
those of nation states but of entire continents.

Foreign trade and the sale of commodities at prices of
production deviating from values

Among the simplifying assumptions of the reproduction
scheme an especially important role is played by the
assumption that commodities exchange at value; that is,
that their prices coincide with their values. This is only
possible if we abstract from competition and suppose that
all that happens in circulation is that one commodity of a
given value is exchanged against another of the same value.
But in reality commodities do not exchange at their values.
Such an assumption has to be dropped and the conclusions
established on that basis further modified.

What sort of modifications are required? Up to now this
problem has always been examined from the standpoint of the
transfer of value among capitalists — a social
process in which the prices of production of individual
commodities differ from their values but on the basis of
total price remaining equal to total value. No one has
systematically tackled the problem of the deviation of
prices from values in international exchange or related
this problem to the overall structure of Marx’s
system. For instance Hilferding and the followers of
Kautsky were in no position to grasp the elements of
novelty in Marx’s treatment of this problem as long
as they were mainly interested in rejecting the theory of
breakdown. This likewise precluded any deeper analysis of
the function of foreign trade under capitalism.

If like Ricardo, we suppose that the law of value is
directly applicable to international trade then the
question of foreign trade has no bearing on the problem of
value and accumulation. On this assumption foreign trade
simply mediates the exchange of use values while the
magnitude of value and profit remains unaltered. In
contrast Marx draws out the role of competition in
international exchange.

If we look at the sphere of production it follows that
the economically backward countries have a higher rate of
profit, due to their lower organic composition of capital,
than the advanced countries. This is despite the fact that
the rate of surplus value is much higher in the advanced
countries and increases even more with the general
development of capitalism and the productivity of labour.
Marx (1959, pp. 150—1) gives an example where the
rate of surplus value is 100 per cent in Europe and 25 per
cent in Asia while the composition of the respective
national capitals is 84c +16v for Europe and 16c + 84v for
Asia. We get the following results for the value of the
product

Asia

16c + 84v + 21s = 121. Rate of profit 21/100 = 21 per
cent

Europe

84c + 16v + 16s = 116. Rate of profit 16/100 = 16 per
cent

International trade is not based on an exchange of
equivalents because, as on the national market, there is a
tendency for rates of profit to be equalised. The
commodities of the advanced capitalist country with the
higher organic composition will therefore be sold at prices
of production higher than value; those of the backward
country at prices of production lower than value. This
would mean the formation of an average rate of profit of
18.5 per cent so that European commodities will sell for a
price of 118.5 instead of 116. In this way circulation on
the world market involves transfers of surplus value from
the less developed to the more developed capitalist
countries because the distribution of surplus value is
determined not by the number of workers employed in each
country but by the size of the functioning capital. Marx
slates that through foreign trade:

three days of labour of one country can
be exchanged against one of another country ... Here the
law of value undergoes essential modification ... The
relationship between labour days of different countries may
be similar to that existing between skilled, complex labour
and unskilled simple labour within a country. In this case,
the richer country exploits the poorer one, even where the
latter gains by the exchange. (1972, pp. 105—6)

In effect price formation on the world market is
governed by the same principles that apply under a
conceptually isolated capitalism. The latter anyway is
merely a theoretical model; the world market, as a unity of
specific national economies, is something real and
concrete. Today the prices of the most important raw
materials and final products are determined
internationally, in the world market. We are no longer
confronted by a national level of prices but a level
determined on the world market. In a conceptually isolated
capitalism entrepreneurs with an above average technology
make a surplus profit (a rate of profit above the average)
when they sell their commodities at socially average
prices. Likewise on the world market, the technologically
advanced countries make a surplus profit at the cost of the
technologically less developed ones. Marx repeatedly draws
out the international effects of the law of value. For
instance he says, ‘most agricultural peoples are
forced to sell their product below its value
whereas
in countries with advanced capitalist production the
agricultural product rises to its value’ (1969, p.
475). In Chapter 22 of Capital Volume One entitled
‘national differences in wages’, Marx
writes:

the law of value in its international
application is ... modified by this, that on the world
market the more productive national labour reckons also as
more intense, so long as the more productive nation is not
compelled by competition to lower the selling price of its
commodities to the level of their value. (1954, p. 525)

With the development of capitalist production in a given
country therefore, the national intensity and productivity
of labour rise above the international average level.

The different quantities of commodities
of the same kind, produced in different countries in the
same working time, have, therefore, unequal international
values, which are expressed in different prices, ie, in
sums of money varying according to international values.
The relative value of money will, therefore, be less in the
nation with a more developed capitalist mode of production,
than in the nation with a less developed. (p. 525)

Likewise in Chapter 17:

the intensity of labour would be
different in different countries, and would modify the
international application of the law of value. The more
intense working day of one nation would be represented by a
greater sum of money than the less intense day of another
nation. (p.492)

Finally in Capital Volume Three:

Capitals invested in foreign trade can
yield a higher rate of profit, because, in the first place,
there is competition with commodities produced in other
countries with inferior production facilities, so that the
more advanced country sells its goods above their value
even though cheaper than the competing countries. In so far
as the labour of the more advanced country is here realised
as labour of a higher specific weight, the rate of profit
rises, because labour which has not been paid as being of a
higher quality, is sold as such ... As regards capitals
invested in colonies, etc, on the other hand, they may
yield higher rates of profit for the simple reason that the
rate of profit there is higher due to backward development,
and likewise the exploitation of labour, because of the use
of slaves, coolies, etc. (1959, p. 238)

In the examples cited above the gain of the more
advanced capitalist countries consists in a transfer of
profit from the less developed countries. it is irrelevant
whether the latter are capitalist or non-capitalist. It is
not a question of the realisation of surplus value but of
additional surplus value which is obtained through
competition on the world market through unequal exchange,
or exchange of non-equivalents.

The enormous significance of this transfer process and
the function of imperialist expansion are only explicable
in terms of the theory of breakdown developed earlier. I
have already shown that capitalism does not suffer from a
hyperproduction of surplus value but, on the contrary, from
insufficient valorisation. This produces a tendency towards
breakdown which is expressed in periodic crises and which
in the further course of accumulation necessarily leads to
a final collapse.

Under these circumstances an injection of surplus value
by means of foreign trade would raise the rate of profit
and reduce the severity of the breakdown tendency.
According to the conception I have developed and which, I
believe, is also Marx’s conception, the original
surplus value expands by means of transfers from abroad. At
advanced stages of accumulation, when it becomes more and
more difficult to valorise the enormously accumulated
capital, such transfers become a matter of life and death
for capitalism. This explains the virulence of imperialist
expansion in the late stage of capital accumulation.
Because it is irrelevant whether the exploited countries
are capitalist or non-capitalist — and because the
latter can in turn exploit other less developed countries
by means of foreign trade — accumulation of capital
at a late stage entails intensified competition of all
capitalist countries on the world market. The drive to
neutralise the breakdown tendency through increased
valorisation takes place at the cost of other capitalist
states. The accumulation of capital produces an ever more
destructive struggle among capitalist states, a continuous
revolutionisation of technology, rationalisation,
Taylorisation or Fordisation of the economy — all of
which is intended to create the kind of technology and
organisation that can preserve competitive superiority on
the world market. On the other side accumulation
intensifies the drift to protectionism in the economically
backward countries.

Kautsky sees the essence of imperialism in a striving to
conquer the non-capitalist agrarian parts of the world. He
therefore sees imperialism as merely an episode in the
history of capitalism that will pass with the
industrialisation of those parts of the world. This
conception is totally false. Imperialism must be understood
in the specific form that Luxemburg gives to it in her
theory of the role of the non-capitalist countries.
Imperialist antagonisms subsist even among the capitalist
states in their relations to one another. Far from being
merely an episode that belongs to the past, imperialism is
rooted in the essence of capitalism at advanced stages of
accumulation. Imperialist tendencies become stronger in the
course of accumulation, and only the overthrow of
capitalism will abolish them altogether.

The argument developed here shows how foreign trade can
function as a means of surmounting crises. While commodity
exports are not confined to periods of crisis or depression
it is a fact that in boom periods, when the level of
domestic prices is high and shows an upward trend,
accumulation in individual spheres of industry creates a
market for industry as a whole, and industry works mainly
for the national market. Foreign trade gains importance in
periods of internal saturation, when valorisation
disappears due to overaccumulation and there is a declining
demand for investment goods. The drive to export in a
period of depression acts as a valve for overproduction on
the domestic market. In Germany after the boom year of 1927
there was a tapering off early in 1928. Although a
depression has still to come there was, in the first four
months of 1928, a retreat in domestic demand practically
all along the line. At the same time however, exports
provided a compensation. From January to April 1928 exports
were around 18.5 per cent higher than in the corresponding
part of the previous year. Thus here we have a means of
partially offsetting a crisis of valorisation in the
domestic economy.

The international character of economic cycles

Far from signifying the impending doom of European
capitalism, as Hildebrand (1910) and others forecast, the
industrialisation of the more backward countries signifies
an expansion of world exports. Contrary to
Luxemburg’s theory the backward countries gain
importance as markets for advanced capitalism precisely to
the degree that they industrialise. Today the
industrialising colonies are much better markets than the
purely agricultural colonies, while the advanced capitalist
countries are the best markets. In fact the notion that the
backward countries, still mainly dependent on agriculture,
could produce enough commodities to pay for the colossal
wealth of the capitalist nations is something bordering on
absurdity.

The fact that the more industrialised a country is the
greater its share of industrial imports, or the fact that
the industrialised nations form the best markets for each
other, helps to explain a phenomenon for which
Luxemburg’s theory has no explanation. I mean the
international character of the economic cycle. An upswing
in production goes together with rising imports of raw
materials, semi-finished goods and soon. In periods of boom
net exports of raw materials and semi-finished goods exceed
net exports of finished commodities, while the ratio is
reversed in periods of depression. Thus there is a strong
correlation between booms and raw material imports.

A boom in one country is communicated to other countries
through the medium of commodity imports. In this way the
rhythm of boom movements becomes progressively
synchronised, even if international differences in the
chronology of the business cycle persist. Even prior to the
War we saw the gradual formation of a parallelism in the
economic cycles of the most important countries. The crises
of 1900, 1907 and 1913 all had an international character.
This parallelism was interrupted by the War and the
breaking off of mutual economic ties, but after the War it
started to crystallise once more.

Table 3.1: German imports 1925—7
(billions of marks)

1925

1926

1927

Raw materials & semi-finished
goods

7.0

5.3

7.7

Finished goods

1.3

1.0

1.8

The minor boom of 1925 was followed by the depression of
1926 when the total volume of imports declined steeply. In
the boom year of 1927 imports exceeded the level of 1925.
It is easy to see that such a rapid increase of German
imports, by 3.2 billion marks, is bound to have an
invigorating effect on the world market. As long as it is
sufficiently strong the boom in a single country can
communicate itself to all its trade partners. For instance
the German boom of 1927 drew along with it all the
neighbouring countries of central and eastern Europe which
have close economic ties to Germany. In that year there was
a revival, of varying strength, in Poland, Czechoslovakia,
Austria, Hungary, Switzerland, Belgium, Netherlands, Sweden
and Finland.

In periods of depression things are reversed. Imports
decline and a chain repercussion starts as orders are
cancelled.

Foreign trade and world monopolies

The tremendous importance of cheap raw materials to the
level of the rate of profit and thus to the valorisation of
capital was first established through practical experience.
However the classical economists found it difficult to
explain the fact theoretically due to their confusion of
the rate of profit with the rate of surplus value. Marx was
the first to establish the connection clearly through his
own exposition of the laws that govern the rate of
profit:

Since the rate of profit is s/C,
or s/c + v, it is evident that
everything
causing a variation in the magnitude of c, and
thereby of C, must also bring about a variation in
the rate of profit, even ifs and v, and their
mutual
relation, remain unaltered. Now, raw materials are one of
the principle components of constant capital ... Should the
price of raw material fall ... the rate of profit rises ...
Other conditions being equal, the rate of profit,
therefore, falls and rises inversely to the price of raw
material. This shows, among other things, how important the
low price of raw material is for the industrial countries.
(1959, p. 106)

Marx goes on to point out that the importance of raw
materials to the level of profitability is constantly
growing with the development of capitalist industry:

the quantity and value of the employed
machinery grows with the development of labour productivity
but not in the same proportion as productivity itself, ie,
not in the proportion in which this machinery increases its
output. In those branches of industry, therefore, which do
consume raw materials ... the growing productivity of
labour is expressed precisely in the proportion in which a
larger quantity of raw material absorbs a definite of
labour, hence in the increasing amount of raw material
converted in, say, one hour into products ... The value of
raw material, therefore, forms an ever-growing component of
the value of the commodity product. (1959, p. 108)

The growing importance of raw materials is also obvious
in the fact that as industrialisation advances every
capitalist country becomes increasingly dependent on raw
material imports. For instance in Germany imports of raw
materials for industrial purposes increased by between 40
to 55 per cent between the late 1880s and 1912.

A further point is that monopolistic controls in the
world market are easier to carry through in the sphere of
raw materials where the range of possible applications is
very wide. Competition among the capitalist powers first
exploded in the struggles to control raw material resources
because the chance of monopoly profits were greatest here.
Yet this is not the only factor. Control over raw materials
leads to control over industry as such. F Kestner says:

Because only raw materials or means of
production are susceptible to long-term monopolisation,
which is generally not the case with finished products -
unless raw material syndicates intervene - cartelisation
necessarily shifts the economic balance in favour of heavy
industry, both in terms of price formation, and in terms of
the fact that the processing industries fall under the sway
of the raw materials industries. (1912, p. 258)

The struggle for control of raw materials is thus a
struggle for control over processing industries, which is
itself finally reducible to the drive for additional
surplus value. Because raw materials are only found at
specific points on the globe, capitalism is defined by a
tendency to gain access to, and exert domination over, the
sources of supply. This can only take the form of a
division of the world. A world monopoly in raw materials
means that more surplus value can be pumped out of the
world market. For competitors who face such a monopoly it
means that the breakdown of capitalism is intensified. The
economic roots of imperialism, of the incessant drive to
dominate territories capitalistically and later
politically, lie in imperfect valorisation.

Perhaps the most obvious case of this is the
Anglo—American struggle over oil. The struggles for
petroleum in the Caucasus, Mesopotamia and Persia are
already well known so I shall be brief here. Oil first
became a burning issue for Britain when the discovery of
the diesel-engine made it possible to substitute liquid
fuel for coal in shipping. Yet the biggest reserves of
crude oil and the bulk of oil production were concentrated
in American hands. Britain saw the American monopoly as a
threat. F Delaisi points out that for close to a century
the whole power of British trade and industry was founded
on her control over coal. Superiority in the coal market,
and especially in the production of bunker coal, enabled
Britain to consolidate its traditional maritime dominance.
Britain could afford to charge cheaper rates on
return-freight than her competitors:

Thus commodities destined for Britain
paid lower transport costs than those destined for other
countries. Hence British industry enjoyed a real premium on
all overseas raw materials. This was an enormous advantage
over all competitors in the struggle to win international
markets. (Delaisi, 1921, p.40)

Once shipping converted to oil all this could change.
Britain produced no petroleum. British domination over sea
transport was seriously threatened. Then there was the
experience of the World War which showed the importance of
automobiles and aircraft. The decisive strategic
significance of allied control over oil reserves became
more and more obvious the longer the War lasted. The oil
politics of the postwar period was a direct consequence of
these experiences.

Britain realised the implications of this situation
quite early on and, at the beginning of this century,
quietly and unobtrusively started to acquire reserves of
oil that were still going. Against Rockefeller’s
Standard Oil Trust, Britain founded a series of oil trusts:
Royal Shell (later expanded into Royal Dutch Shell),
Mexican Eagle, Anglo-Persian Oil, etc. Britain even settled
down in the USA to take on the competition of Standard Oil.
By 1919 The Times could report a speech by G
Prettyman, a well-known oil expert, who on the inauguration
of the new Anglo-Persian refinery was quoted as saying:

At the outbreak of the War the position
was such that the British Empire with her enormous
worldwide interests controlled only two per cent of world
petroleum reserves ... On the currently prevalent
foundations and methods of work used, about which he would
not like to go into detail, he feels that once differences
are settled, the British Empire should not be very far from
controlling over half the world’s known reserves of
petroleum. (7 May 1919)

This result could be achieved thanks to a powerful
vertical concentration of the entire industry from
production down to distribution, and the corresponding
conglomeration of capital which could exert fantastic
pressure.

The British oil industry was thus welded together into a
single block which today embraces 90 per cent of all
Britain’s oil interests. At the end of 1920
Anglo-Persian Oil unified some 77 companies with a nominal
capital of around £120 million, and Royal Dutch Shell
50 firms with £300 million. Apart from these, there
were another 177 companies representing a capital of
£266 million. Altogether these firms represent a total
capital of £686 million; 52 per cent of this is
invested in production, 16 per cent in trade, 12 per cent
in transport and 11 per cent in refining.

What was the point of this huge effort? Military
security is only part of the answer. Delaisi notes that
‘Britain no longer needs to fear the American
monopoly’ (p. 58). Just prior to the War Britain
controlled all the most important coal stations. For the
future it sought to control the major oil stations through
a tightly organised petroleum industry. One of the basic
objectives of Britain’s oil strategy was to attain a
near monopoly over the transportation of oil. How far this
succeeded can be gauged from a report in The Times
of March 1920, cited by Delaisi, which quotes Sir Edgar
Mackay as saying:

I can say that two thirds of the fields
in operation in Central and South America are in British
hands ... The Shell group controls interests in all the
important oilfields on earth, including those in the USA,
Russia, Dutch East Indies, Rumania, Egypt, Venezuela,
Trinidad, British India, Ceylon, the Malay States, north
and south China, Siam, the Straits Settlements and the
Philippines. (Delaisi, 1921, p. 64)

The economic significance was drawn out when Mackay
said:

Assuming their current curve of
consumption rises further, then after ten years the United
States will have to import 500 million barrels a year which
makes, even supposing a very low price of $2 per barrel, an
annual expenditure of $1 billion, and most of that, if not
all, will go into British pockets. (p. 64)

The idea of joint international control over raw
material resources has been mooted time and time again.
Even the International Congress of Mineworkers, which took
place in August 1920, formulated a resolution calling for
the creation of a central international office in the
League of Nations. Such an office would not only produce a
detailed inventory of all existing resources and gather
statistics on them; it would also look after the
‘distribution of fuels, minerals and other raw
materials’. Such proposals are utopian. I have
already shown that the antagonisms of world economy find
their deepest source in the lack of valorisation which goes
together with the general advance of accumulation. A
shortage of surplus value in one national economy can only
be compensated at the expense of other economies. Even
capitalist attempts to create joint world monopolies have
ended in failure, due to irreconcilable interests among the
various parties.

The conflict of interests remains the basic aspect in
the sense that the whole function of world monopolies lies
in the national enrichment of some economies at the cost of
others. As a result the increasingly frequent projects to
evolve joint control and distribution schemes for raw
materials remain pious wishes. Marx already pointed out,
with prophetic foresight, that the attempts to regulate
production that are often discernible in periods of crisis
vanish:

as soon as the principle of competition
again reigns supreme ... All thought of a common,
all-embracing and far-sighted control over the production
of raw materials gives way once more to the faith that
demand and supply will mutually regulate one another. And
it must be admitted that such control is on the whole
irreconcilable with the laws of capitalist production and
remains for ever a pious wish, or is limited to exceptional
cooperation in times of great stress and confusion. (1959,
p. 120)

The function of capital exports under capitalism

Earlier presentations of the question

From a scientific point of view we have to explain why
capital is exported and what role is played by the export
of capital in the productive mechanism of the capitalist
economy.

Sombart is the best example of the superficial way in
which these problems are handled in the prevailing
theories. He tells us: ‘No one can doubt that
economic imperialism basically means that by enlarging
their sphere of political influence, the capitalist powers
are enabled to expand the sphere of investment for their
superfluous capital’ (1927, p. 71). Here the relation
between capital expansion and the drive for power is
wrongly described; Sombart makes the drive for power the
precondition for capital expansion. The opposite is the
case — capital expansion is a precursor of the
political domination that follows.

Secondly, from a purely economic point of view, Sombart
does not explain why there is such a thing as the expansion
of capital to foreign territories. This is something
self-evident for him. What we have to explain theoretically
is simply presupposed as obvious without any analysis or
proof. Why are capitals not invested in the home country
itself? Because they are superfluous? But what does
superfluous mean? Under what conditions can a capital
become superfluous? Sombart simply uses phrases without the
slightest attempt to clarify things scientifically.

This issue has been debated for a whole century ever
since Ricardo argued that when ‘merchants engage
their capitals in foreign trade, or in the carrying trade,
it is always from choice and never from necessity: it is
because in that trade their profits will be somewhat
greater than in the home trade’ (1984, p. 195).

In his book on imperialism J A Hobson maintains that
foreign investments form ‘the most important factor
in the economics of imperialism’ (1905, p. 48). He
goes on to state that:

Aggressive imperialism ... which is
fraught with such grave incalculable peril to the citizen,
is a source of great gain to the investor who cannot find
at home the profitable use he seeks for his capital, and
insists that his government should help him to profitable
and secure investments abroad. (p. 50)

But why are profitable investments not to be found at
home? Hobson does not refer to this decisive question. In
general his study, which is a valuable descriptive work,
evades all theoretical issues. A Sartorius von
Waltershausen states that ‘in today’s world
economy the agrarian countries are net importers of
capital, the industrialised countries net exporters’
(1907, p. 52). However he adds that ‘even the highly
developed countries stand in debtor—creditor
relationships to one another’ (p. 52). Obviously the
agrarian/industrialised distinction cannot account for
export of capital. In that case what is the driving force
behind this? Sometimes Sartorius refers to ‘economic
saturation’, a superfluity of the available capital
in relation to investment possibilities. But this is not
explained. Sartorius appears to have a vague feeling that
such a state of saturation is linked to a relatively
advanced stage of capitalist development. But Sartorius
stays at this purely empirical level.

The treatment of this problem by S Nearing and J Freeman
is just as unsatisfying. They agree that the industrialised
countries of Europe became exporters of capital only at a
specific stage in their development. The same is true of
America: ‘The United States also reached this stage
at the start of the present century’(1927, p. 23).
The trend was then accelerated by the war — a whole
process of development which might otherwise have taken
much longer was compacted into a single decade by the
events of the war. But what were these events? The war
enormously speeded up the transformation of the USA from
the position of a debtor to one of a creditor. The USA
became a capital exporting nation ‘and was bound to
remain so as long as there was surplus capital looking for
investment’ (p. 24). But the authors do not show why
such a surplus emerges or why it cannot find investment in
the domestic economy.

Even in Marxist writings we search in vain for any
explanation of the specific function of capital exports in
the capitalist system. Marxists have simply described the
surface appearances and made no attempt to build these into
Marx’s overall system. So Varga says, ‘The
importance of capital exports to monopoly capitalism was
analysed in detail by Lenin in Imperialism; hardly
anything new can be added’ (1928, p. 56). Elsewhere
he simply casts aside any attempt to analyse the problem
theoretically and simply produces facts about the volume
and direction of international capital flows. ‘The
rate of profit’, he says, ‘regulates not only
the influx of capital into individual branches of industry,
but also its geographical migrations. Capital is invested
abroad whenever there are prospects ofobtaining a higher
rate of profit’ (1927, p. 363). This conclusion is
hardly original.

Varga fails to understand the dimensions of the question
when he goes on to say, ‘Capital is exported not
because it is absolutely impossible for it to accumulate
domestically without “thrusts into non-capitalist
markets”, but because there is the prospect of higher
profit elsewhere’ (p. 363). In other words Varga
starts from the false assumption that whatever its total
amount, capital can always find an unlimited range of
investment possibilities at home. He overlooks the simple
fact that in denying the possibility of an overabundance of
capital, he simultaneously denies the possibility of an
overproduction of commodities. In addition Varga imagines
any argument that there are definite limits to the
accumulation of capital, and that capital export
necessarily follows, is incompatible with Marx’s
conception and can only be made from Luxemburg’s
position.

I shall show that Varga’s conception is untenable,
that it was precisely Marx who showed that there are
definite limits to the volume of capital investments in any
single country; that it was Marx who explained the
conditions under which there arises an absolute
overaccumulation of capital and therefore the compulsion to
export capital abroad. Varga does not notice that his
conception of unlimited investment possibilities flatly
contradicts and is incompatible with any labour theory of
value. Investment of capital demands surplus value. But
surplus value is labour and in any given country labour is
of a given magnitude. From a given working population only
a definite mass of surplus labour is extortable. To suppose
that capital can expand without limits is to suppose that
surplus value can likewise expand without limits, and thus
independently of the size of the working population. This
means that surplus value does not depend on labour.

Sternberg argues that the export of capital constitutes
a powerful factor for generating a surplus population. By
reinforcing the reserve army it depresses the level of
wages and enables a surplus value to arise(!). The
expansion of capital ‘is therefore one of the
strongest supports of the capitalist relation and its
continuity over time’ (1926, p. 36) because a surplus
value can arise ‘only if there is a surplus
population’ (p. 16).

Export of capital is supposed to be the most powerful
factor of surplus population. Yet in Germany in the years
1926—7 we saw the exact opposite: massive inflows of
foreign capital were crucial to the general wave of
rationalisation and played a major role in displacing
workers or creating a surplus population. If it were simply
a question of reducing the amount of capital so as to
reduce the demand for labour then a simple transfer of
capital would be enough to solve this. For instance German
capitalists can go to Canada and settle down there. But
this is not an export of capital so much as a loss of
capital. In fact if it were simply a question of reducing
the amount of capital, the essential aspect of capital
exports - the drive to improve the conditions for the
further expansion of capital — would no longer
hold.

Sternberg tries to explain the export of capital, as he
does all other phenomena of capitalism, by reference to
competition. Yet the problem is to explain capital exports
in abstraction from competition and therefore from the
existence of a surplus population. The question is, what
compels the capitalist to export capital when there is no
reserve army and labour power is sold at its value?

Hilferding is not much better. Because he denies the
possibility of a generalised overproduction of commodities,
there are no limits to the investment of capital in a given
country. So capital is exported only because a higher rate
of profit can be expected: ‘The precondition for the
export of capital is the variation in rates of profit, and
the export of capital is the means of equalising national
rates of profit’ (1981, p. 315). The same holds for
Bauer. Inequality of profit rates is the sole reason why
capital is exported: ‘Initially the rate of profit is
higher in the more backward countries which are the targets
of imperialist expansion ... capital always flows to where
the rate of profit is highest’ (1924, p. 470).

Capital exports are thus explained in terms of the
tendency for the rate of profit to equalise. But Bauer has
the feeling that this explanation is quite useless when it
comes to understanding modern imperialism. There has always
been a tendency for rates of profit to equalise, whereas
capital exports from the advanced capitalist countries
started with real vigour only recently. Bauer himself
says:

The drive for new spheres of investment
and new markets is as old as capitalism itself; it is as
true of the capitalist republics of the Italian Renaissance
as of Britain or Germany today. But the force of this
tendency has increased enormously in the recent decades.
(p. 471)

How does he explain this? Ultimately Bauer has to look
for an explanation of rising capital exports in the
aggressive character of modem imperialism, which is
precisely what has to be explained. Apart from this, if
higher rates of profit are what account for the flow of
capital to the less developed continents of Asia, Africa
and elsewhere, then it is impossible to understand why
capital should ever be invested in the industries of Europe
and the United States. Why is the whole surplus value not
earmarked for export as capital?

In fact we have already seen that an average rate of
profit forms on the world market. On page 247 of his book
Bauer knows this. But when he comes to deal with the roots
of export of capital and imperialist expansion (p. 461) he
forgets it and falls back onto the banal conception that
the higher rate of profit of the backward countries is the
cause of capital exports. We argued earlier that on the
world market the technologically more advanced countries
make a surplus profit at the cost of the technologically
backward nations with a lower organic composition. This is
what stimulates and simultaneously drives capital to keep
developing technology, to force through continuous
increases in the organic composition in the advanced
countries. Yet this only means that as progressively higher
levels of organic composition are introduced, a field is
simultaneously created for more profitable investments.
However high profits may be in the colonial countries, they
would appear to be higher still in the chemical and heavy
industries at home which, given their organic composition,
are making surplus profits. So the question remains —
why is capital exported at all? Bauer can’t explain
this.

It is not necessarily true that in countries recently
opened up to capitalist production the organic composition
is always lower. While West European capitalism may have
needed 150 years to evolve from the organisational form of
the manufacturing period into the sophisticated world
trust, the colonial nations do not need to repeat this
entire process. They take over European capital in the most
mature forms it has already assumed in the advanced
capitalist countries. In this way they skip over a whole
series of historical stages, with their peoples dragged
straight into gold and diamond mines dominated by
trustified capital with its extremely sophisticated
technological and financial organisation. Does Bauer mean
to suggest that British capitalists invest in railway
construction in Africa or South America because the organic
composition of the railways there is lower than in England?
Argentina’s beef industry works on huge refrigerated
plants equipped with the most modern technology with large
sums of capital invested by the meat-processing firms of
Chicago. An industry of this type could only have developed
after a revolutionary change in transport and refrigeration
techniques, and this again presupposes a high organic
composition of capital.

Bauer senses that there is no factual basis in the
argument about higher rates of profit in less developed
countries, so he drags in various other factors in the
conviction that piling up doubtful arguments is a good
enough substitute for one correct one. ‘At any given
time’, he says, ‘a part of the social money
capital always lies fallow’ (1924, p. 462). ‘If
too much money capital lies fallow the consequences can be
disastrous for capitalism’ (p. 462). Therefore there
is a drive for spheres of investment that will absorb the
superfluous capital. One form of this drive is the export
of capital which, according to Bauer, ‘reduces the
volume of capital that lies fallow in a given country at a
given time’ (p. 470).

Here two completely different explanations tend to
coalesce. One deals with productive capital, the other with
money capital that is not active in production. In his
second theory Bauer has merely confused money capital which
is deposited in banks with capital that lies fallow and
searches for investment opportunities. A portion of the
total social capital must always exist in the form of
money, in the shape of money capital. If reproduction is to
be continuous the size of this portion cannot be reduced at
will. The period of time which capital, individual or
total, spends in any of its three forms is not determined
arbitrarily by bankers or industrialists. It is objectively
given. And because the size of money capital is not
arbitrarily determined, any more than is the size of
commodity capital or productive capital, definite numerical
ratios must obtain in the division of capital into three
portions. Marx says:

The magnitude of the available capital
determines the dimensions of the process of production, and
this again determines the dimensions of the commodity
capital and money capital in so far as they perform their
functions parallel with the process of production. (1956,
p. 106)

Summarising the results of his analysis Marx writes:

Certain laws were found according to
which diverse large components of a given capital must
continually be advanced and renewed — depending on
the conditions of the turnover — in the form of money
capital in order to keep a productive capital of a given
size constantly functioning. (p. 357)

He goes on to add that to ‘set the productive
capital in motion requires more or less money capital,
depending on the period of turnover’ (p. 361). So
although money capital is itself unproductive — it
creates no value or surplus value and limits the scale of
the productive component of capital — it cannot be
arbitrarily diminished or cast aside because it fulfils
necessary functions.

Bauer turns all this upside down. In Marx the money
capital that lies fallow is only a portion of industrial
capital in its real circuit, constituting a unity of its
three circuits. In Bauer money capital that lies fallow is
a part of money capital ‘which has been pushed out of
the circuit of capital’ (1924, p. 476).

In Marx the size of the money capital depends on the
length of the turnover period. In Bauer the length of the
turnover period depends on the size of the money capital.
So instead of a slower turnover tying up too much money
capital, an accumulation of too much money capital slows
down the turnover according to Bauer.

The upshot is that production does not determine
circulation, circulation determines production. Bauer says:
‘Any change in the ratio of fallow to invested
capital, of productive capital to capital in circulation
... completely transforms the picture of bourgeois
society’ (p. 463). The mystical power of money
capital to do this lies with the banks. In fact expansion
is only possible due to the banks: ‘Thanks to the
scale of resources at their disposal at any given time,
they [the banks] can consciously direct the flow of capital
to the dominated areas’ (p. 472). Capital is exported
because the banks decide it. The banks seemingly can do
what they like.

So what of the objective laws of capitalist circulation?
Obviously for Bauer these must belong to the realm of
fantasy.

Bauer refers to fallow money capital which is expelled
from the circulation of industrial capital and returns to
production through the export of capital. But from
statistics on international trade, Bauer knows that
international capital movements take place mainly in the
form of commodities and hardly at all in the form of money
or as money capital. It is not money capital but commodity
capital which is expelled from the circulation of
industrial capital. This merely shows that there is an
overproduction of commodity capital which is unsaleable and
which cannot therefore find its way back into production.
In fact Baser himself accepts that export of capital
creates an outlet for commodities.

Overaccumulation and export of capital in Marx’s
conception

Marx points to the consistency of Ricardo’s
argument that if overproduction of commodities is
impossible then there ‘cannot ... be accumulated in a
country any amount of capital which cannot be employed
productively’ (Ricardo, 1984, p. 193).

This proposition is founded on J B Say’s thesis
that demand and supply are identical. It shows that
‘Ricardo is always consistent. For him, therefore,
the statement that no overproduction (of
commodities) is possible, is synonymous with the statement
that no plethora or overabundance of capital is
possible’ (pp. 496—7). Marx then refers to the
‘stupidity of his [Ricardo’s]
successors’:

who deny overproduction in one form (as
a
general glut of commodities on the market) and who not only
admit its existence in another form, as overproduction of
capital, plethora of capital, overabundance of capital, but
actually turn it into an essential point of their doctrine.
(p. 497)

The epigones of Marx, for instance Varga, merely reverse
this stupidity. They accept the overproduction of
commodities and even ‘make this a fundamental part of
their doctrine’, but deny the overproduction of
capital.

For Marx there could be no fundamental distinction
between the two phenomena. The question is: what is the
relation between these two forms of overproduction, the
form in which it is denied and the form in which it is
asserted or accepted? ‘The question is, therefore,
what is the overabundance of capital and how does it differ
from overproduction?’ (p. 498).

Those economists who admit to the possibility of an
overabundance of capital maintain that ‘capital is
equivalent to money or commodities. So overproduction of
capital is overproduction of money or of commodities. And
yet the two phenomena are supposed to have nothing in
common with each other’ (p. 498). Against this
‘thoughtlessness, which admits the existence and
necessity of a particular phenomenon when it is called A
and denies it when it is called B’ (p. 499) Marx
emphasises that when we are dealing with overproduction we
are not dealing merely with an overproduction of
commodities as commodities. We are dealing with ‘the
fact that commodities are here no longer considered in
their simple form, but in their designation as
capital’ (p. 498). The commodity ‘becomes
something more than, and also different from, a
commodity’ (p. 499).

In a situation of overproduction the producers confront
one another not as pure commodity owners but as
capitalists. This means that in every crisis the
valorisation function of capital is disrupted. A capital
that fails to valorise itself is superfluous, overproduced
capital. In this sense overproduction of commodities and
overproduction of capital are the same thing.
‘Overproduction of capital, not of the individual
commodities — although overproduction of capital
always includes overproduction of commodities — is
thus simply overaccumulation of capital’ (Marx, 1959,
p. 251).

The heart of the problem of capital exports lies in
showing why it is necessary and under what conditions it
comes about. Marx’s achievement was that he did
precisely this.

Marx showed the circumstances which determine a
tendential fall in the rate of profit in the course of
accumulation. The question arises — how far can this
fall go? Can the rate of profit fall to zero? Many writers
believe that only in such a case can we speak of an
absolute overaccumulation of capital. As long as capital
yields a profit, however small, we cannot speak of
overaccumulation in an absolute sense because the
capitalist would rather be content with a small profit than
have no profit at all.

I shall show that this idea is completely false, that
there is a limit to the accumulation of capital and this
limit comes into force much earlier than a zero rate of
profit. There can be absolute overaccumulation even when
capital yields a high interest. The crux of the matter is
not the absolute level of this interest, but the ratio of
the mass of surplus value to the mass of accumulated
capital.

In identifying the conditions on which this limit
depends mere empiricism is quite useless. For instance in
the utilisation of fuel the experience of almost 100 years
has shown that it was always possible to obtain a greater
quantity of heat from a given quantity of coal. Thus
experience, based on several decades’ practice, might
easily suggest that there is no limit to the quantity of
heat obtainable through such increases. Only theory can
answer the question whether this is really true, or whether
there is not a maximum limit here beyond which any further
increases are precluded. This answer is possible because
theory can calculate the absolute quantity of energy in a
unit of coal. Increases in the rate of utilisation cannot
exceed 100 per cent of the available quantity of energy.
Whether this maximum point is reached in practice is of no
concern to theory.

Starting from considerations of this sort Marx asks,
what is overaccumulation of capital? He answers the
question thus: ‘To appreciate what this
overaccumulation is ... one need only assume it to be
absolute. When would overproduction of capital be
absolute?’ (1959, p. 251) According to Marx absolute
overproduction would start when an expanded capital could
yield no more surplus value than it did as a smaller
capital:

As soon as capital would, therefore,
have
grown in such a ratio to the labouring population that
neither the absolute working time supplied by this
population, nor the relative surplus working time, could be
expanded any further (this last would not be feasible at
any rate in the case where the demand for labour were so
strong that there were a tendency for wages to rise); at a
point, therefore when the increased capital produced just
as much, or even less, surplus value than it did before its
increase, there would be absolute overproduction of
capital. (p. 251)

According to Marx’s definition of absolute
overaccumulation it is not necessary for profit on the
total capital to disappear completely. It disappears only
for the additional capital which is accumulated. In
practice the additional capital will displace a portion of
the existing capital so that for the total capital a lower
rate of profit results. However whereas a falling rate of
profit is generally bound up with a growing mass of profit,
absolute overaccumulation is characterised by the fact that
here the mass of profit of the expanded total capital
remains the same.

To understand the conditions under which this occurs I
shall first analyse the simplest case where population and
the productivity of labour are constant.

Absolute overaccumulation of capital with the size of
population and technology held constant

Marx says:

Take a certain working population of,
say, two million. Assume, furthermore, that the length and
intensity of the average working day, the level of wages,
and thereby the proportion between necessary and surplus
labour, are given. In that case the aggregate labour of
these two million, and their surplus labour expressed in
surplus value, always produces the same magnitude of value.
(1959, pp. 216—17)

Under these presuppositions capital accumulation runs up
against a maximal limit which can be calculated exactly
because the maximum amount of surplus value obtainable is
exactly given. It would make no sense to continue
accumulation beyond this limit because any expanded capital
would yield the same mass of surplus value as before. If
accumulation were continued it would necessarily lead to a
devaluation of capital and a sharp fall in the rate of
profit:

a portion of the capital would lie
completely or partially idle (because it would have to
crowd out some of the active capital before it could expand
its own value), and the other portion would produce values
at a lower rate of profit owing to the pressure of
unemployed or but partly employed capital ... The fall in
the rate of profit would then be accompanied by an absolute
decline in its mass ... And the reduced mass of profit
would have to be calculated on an increased total capital.
(1959, p. 252)

This constitutes a case of absolute overaccumulation of
capital ‘because capital would be unable to exploit
labour ... to the degree which would at least increase the
mass of profit along with the growing mass of employed
capital’ (p. 255). According to Marx this would be
the case ‘in which more capital is accumulated than
can be invested in production ... This results in loans
abroad, etc. in short, to speculative investments’
(1969, p. 484).

Absolute overaccumulation with a growing population and
changing technology (increases in the organic composition
of capital)

It would be wrong to conclude that absolute
overaccumulation is only possible when population and
technology are held constant. Using Bauer’s scheme I
have shown that it can and must arise on the basis of the
assumptions: a) of a progressively rising organic
composition of capital and b) of annual increases in
population. Under the conditions postulated by this model,
absolute overaccumulation does not set in immediately but
only after a certain interval. I showed (in Table 2.2, p.
75) that after year 21 the capitalists could have no
interest in accumulating at the existing rate (10 per cent
for constant capital, 5 per cent for variable)
because a capital expanded at this rate would be too large
to be valorised to the same degree.

The personal consumption of the capitalists would start
declining. So instead of accumulating the surplus value (of
year 20) — that is, incorporating it into the
original capital — they will earmark it for capital
export.

Since businessmen are not inclined to cut down their own
consumption, there will be a shortage of the portion
earmarked for accumulation. By year 36 there has to be a
reserve army (of 11 509 workers) and simultaneously a
superfluous capital (of 117 174). This is the situation
that prevailed in Britain early in 1867 as reported in
Reynolds’ Newspaper: ‘At this
moment,
while English workmen with their wives and children are
dying of cold and hunger, there are millions of English
gold — the produce of English labour — being
invested in Russia, Spain, Italy and other foreign
countries’ (Marx, 1954, p. 625).

From this moment on accumulation runs into difficulties.
The profit earmarked for accumulation cannot be invested in
expanding business in the industry in which it was made.
This is because industry is saturated with capital. Marx
says:

if this new accumulation meets with
difficulties in its employment, through a lack of spheres
of investment, ie, due to a surplus in the branches of
production and an oversupply of loan capital, this plethora
of loanable money capital merely shows the limitations of
capitalist production ... an obstacle is indeed
immanent in its laws of expansion, ie, in the limits in
which capital can realise itself as capital. (1959, p.
507)

The limits to accumulation are specifically capitalist
limits and not limits in general. Social needs remain
massively unsatisfied. Yet from the standpoint of capital
there is superfluous capital because it cannot be
valorised.

It is absolutely false to argue, as Luxemburg does, that
Marx’s reproduction scheme ‘contradicts the
conception of the capitalist total process and its course
as laid down by Marx in Capital Volume Three’
(1968, p. 343). The fundamental idea underlying
Marx’s scheme is the immanent contradiction between
the drive towards an unlimited expansion of theforces of
production and the limited valorisation possibilities of
overaccumulated capital. Precisely this is the necessary
consequence of Marx’s schemes of reproduction and
accumulation. Because Luxemburg transformed these limited
valorisation possibilities into a limited capacity for
consumption she could find no trace of that immanent
contradiction in thescheme itself. Against this Marx shows
that:

the self expansion of capital based on
the contradictory nature of capitalist production permits
an actual free development only up to a certain point, so
that in fact it constitutes an immanent fetter and barrier
to production, which are [sic] continually broken through
by the credit system. (1959, p. 441)

The limit of overaccumulation is broken through by the
credit system, that is, by export of capital and the
additional surplus value obtained by means of it. It is in
this specific sense that the late stage of accumulation is
characterised by the export of capital.

How does Luxemburg reconcile the fact of capital exports
with her theory of the non-realisability of surplus value
under capitalism? She devotes a special chapter,
‘international loans’ (1968, Chapter 30) to
this question. Over some 30 pages she tells us how the
capitalist countries of Europe export capital to the
non-capitalist countries, build factories there, create a
capitalist system and draw them by stages into their own
sphere of influence. But there is not a word about how the
surplus value produced in the former is realised in the
latter. Instead we are told how the masses of Egypt and
elsewhere have to work for long hours at low wages, how
they are drawn into the capitalist nexus. In short
Luxemburg shows us not how the surplus value produced under
capitalism is realised in the backward countries but how an
additional surplus value is produced in these countries, by
means of capital exports, and brought back to the countries
of advanced capitalism. The existence of capital exports is
not only irreconcilable with Luxemburg’s theory, it
directly contradicts it. Capital exports bear no relation
to the realisation of surplus value. They are related to
the problem of production, of the production of additional
surplus value abroad.

An inductive verification

I have proposed two sorts of argument: i) that the
valorisation of capital is the driving force of capitalism
and governs all the movements of the capitalist mechanism
— its expansions and contractions. Initially
production is expanded because, in the early stages of
accumulation, profit grows.

Afterwards accumulation comes to a standstill because,
at a more advanced stage of accumulation, and due to the
very process of accumulation, profit necessarily declines.
ii) Apart from trying to explain the oscillations of the
business cycle I have tried to define the law of motion of
capitalism - its secular trend - or, in Marx’s words,
the general tendency of capitalist accumulation. I have
shown how the course of capital accumulation is punctuated
by an absolute overaccumulation which is released, from
time to time, in the form of periodic crises and which is
progressively intensified through the fluctuations of the
economic cycle from one crisis to the next. At an advanced
stage of accumulation it reaches a state of capital
saturation where the overaccumulated capital faces a
shortage of investment possibilities and finds it more
difficult to surmount this saturation. The capitalist
mechanism approaches its final catastrophe with the
inexorability of a natural process. The superfluous and
idle capital can ward off the complete collapse of
profitability only through the export of capital or through
employment on the stock exchange.

To take up this latter aspect. Hilferding devotes a
whole chapter to speculation and the stock exchange (1981,
Chapter 8). All we learn from it is that speculation is
unproductive, that it is a pure gamble, that the mood of
the stock exchange is determined by the big speculators,
and banalities of this sort. Because Hilferding denies the
overaccumulation of capital he removes any basis for
understanding the essential function of speculation and the
exchange. In his exposition the stock exchange is a market
for the circulation of titles of ownership, divorced from
and rendered independent of the circulation of the actual
goods. Its function is to mobilise capital. Through the
conversion of industrial capital into fictitious capital on
the exchange, the individual capitalist always has the
option open to withdraw his capital in the form of money
whenever he likes. Finally the mobilisation of capital in
the form of shares, or the creation of fictitious capital,
opens the possibility of capitalising dividends. According
to Hilferding speculation is necessary to capitalism for
all these reasons.

In all this there is no reference to the function of
speculation in the movement of the business cycle. I have
already pointed out that superfluous capital looks for
spheres of profitable investment. With no chance in
production, capital is either exported or switched to
speculation. Thus in the depression of 1925—6 money
poured into the stock exchange. Once the situation improved
at the end of 1926 and the start of 1927 credits were
displaced from the exchange into production.

The relationship between the banks and speculation which
is discernible in the specific phases of the business cycle
is also reflected in minor fluctuations within any given
year. In periods when the banks can employ their resources
elsewhere the exchange is subdued; it becomes brisk only
when those resources are again released. Speculation is a
means of balancing the shortage of valorisation in
productive activity by gains that flow from the losses made
on the exchange by the mass of smaller capitalists. In this
sense it is a power mechanism in the concentration of money
capital.

Let us take the present economic situation of the USA as
an example of these movements. Despite the optimism of many
bourgeois writers who think that the Americans have
succeeded in solving the problem of crises and creating
economic stability, there are enough signs to suggest that
America is fast approaching a state of overaccumulation. A
report dated June 1926 notes that

Since the War the capital formation
process has advanced with extreme rapidity. Capital is now
looking for investment outlets, and due to its overflow, it
can only find these at declining rates of interest.
Naturally this has meant an increase of all ... real estate
values ... Furious speculation in the real estate is one
result. (Wirtschaftsdienst, 1926,1, p. 792)

The basic characteristic of the economic year 1927 is
that industry and commerce have watched their production
fall, their sales decline and their profits contract.
Reduced sales and lower production release a portion of the
capital which flows into the banks in the form of deposits.
The banks attract industrial profits for which there are no
openings in industry and commerce. At the end of 1927 the
holdings of the member banks of the US Federal Reserve
System were $1.7 billion more than a year earlier. This
constitutes a rise of 8 per cent against the 5 per cent
considered normal.

The retrogression in industry and commerce contrasts
sharply with the overabundance of cheap credit money.

The discount policy of the Federal Reserve Board has to
be seen in this context. It is not that capital flows into
Europe because rates of interest are higher. On the
contrary US rates of interest have been cut in order to
promote an outflow of capital. The financial expert Dr
Halfeld reports that there were two reasons why in August
1927 the US banks of issue reduced the discount rate from 4
per cent to 3.5 per cent. Firstly to create an outflow of
gold to Europe which is short of capital and, secondly, to
revive domestic business. Yet this discount policy failed.
Despite the substantial outflow of gold, US interest rates
continued to remain low in the open market and vast sums of
money were directed into speculation. The depressed state
of industry is reflected by an expansion of speculative
loans and speculative driving up of share prices. According
to estimates of the US department of commerce, in 1927 the
USA invested $1 .648 billion of new capital abroad. While
this was partly matched by a reverse flow of $919m, the
greater part of this money flowed straight into the New
York stock exchange for speculation. Advances by New York
banks by way of brokers’ loans on the stock exchange
totalled $4.282 billion at the start of May — 46 per
cent higher than in the previous year. On the other side,
disbursements to industry and commerce remained low up to
the middle of February. Towards the end of March there was
a massive outflow of capital from the country, including
large-scale buying up of foreign securities.

As a countervailing measure, the federal reserve banks
decided on a discount policy which was the reverse of the
one followed late in 1927. All twelve banks raised the
discount rate from 3.5 per cent to 4 per cent. In April
1928 the Chicago and Boston bankers increased the rate a
second time to 4.5 per cent and several banks followed
suit. The discount rate thus returned to a level not seen
by American money markets since early 1924. The results of
the new discount policy appear to have been a complete
failure if we go by the staggering bout of speculation on
the New York stock exchange in the last week of March 1928.
In fact despite the measures taken by the clearing house
association against further extension of speculative
credits, the flood of speculation reached a feverish pitch
by August.

The fever of speculation is only a measure of the
shortage of productive investment outlets. Dr Flemming is
therefore quite right in saying that loans to foreign
countries offer one way of eliminating difficulties since
income from production cannot be redeployed on the domestic
market. Not higher profits abroad, but a shortage of
investment outlets at home is the basic underlying cause of
capital exports.

Today America is doing its best to avert the coming
crash — already foreshadowed in the panic selling on
the stock exchange of December 1928 — by forcing up
the volume of exports. The recent Copper Exporters
Incorporated has been followed by the formation of the
Steel Export Association of America, a joint export
organisation of the two major American concerns - US Steel
Corporation and Bethlehem Steel. When these efforts are
matched by a similar drive by the Germans and the British,
the crisis will only be intensified.

The result: intensified international struggle for
investment outlets, transformations in the relationship of
finance capital and industrial capital

Lenin was quite correct in supposing that contemporary
capitalism, based on the domination of monopoly, is
typically characterised by the export of capital. Holland
had already evolved into a capital exporter by the close of
the seventeenth century. Britain reached this stage early
in the nineteenth century, France in the I 860s. Yet there
is a big difference between the capital exports of
today’s monopoly capitalism and those of early
capitalism. Export of capital was not typical of the
capitalism of that epoch. It was a transient, periodic
phenomenon which was always sooner or later interrupted and
replaced by a new boom. Today things are different. The
most important capitalist countries have already reached an
advanced stage of accumulation at which the valorisation of
the accumulated capital encounters increasingly worse
obstacles. Overaccumulation ceases to be a merely passing
phenomenon and starts more and more to dominate the whole
of economic life.

This is the case with France which, according to B
Mehrens ‘has an almost chronic superfluity of
money’ (1911, p. 230). This superabundance of capital
is interrupted by periods of boom. But these boom periods
are becoming shorter and shorter. The revival which started
in Germany in 1910 was already over by 1912. The boom was
over so quickly that A Fuller asked somewhat
melancholically, ‘Now was that a boom, or were we
already in the purgatory of the depression?’ (1914,
p. 109).

Since 1918 the economic cycle has become progressively
shorter. This is perfectly comprehensible in terms of the
theory I have developed in this book. As rationalisation
sustained its momentum after the war the accumulation of
capital lurched forward sharply. A substantial part of
plant expansions was carried through with the help of
foreign loans. However in economic terms this is irrelevant
to the fact that capital expanded enormously with the
result that the valorisation of the expanded capital became
more difficult. Apart from this, the problem of
valorisation was further aggravated by the fact that
America was now absorbing one part of the surplus value in
the form of interest on her loans. At this advanced stage
of accumulation booms become less intensive; they have
changed their character ‘Today we no longer expect
booms to bring increased prosperity to all sectors of the
economy ... We are generally quite content if industry as a
whole tends to prosper, and especially if the main
industries and firms show higher prosperity’ (Feiler,
1914, p. 106).

Under these circumstances the overabundance of capital
can only be surmounted through capital exports. This has
therefore become a typical and indispensable move in all
the advanced capitalist countries. Export of capital has
thus become a means of warding off the breakdown, of
prolonging the life-span of capitalism.

The bourgeois economist proclaims triumphantly that
Marx’s theory of breakdown and crises is false and
contradicted by the actual development.

He is generous enough to concede that it bore some
correspondence to the formative period of capitalism in the
1840s. But when conditions changed the theory simply had
the ground removed from under its feet:

When Marx worked out his theory of
crisis
... one could actually suppose that the recessions
following the booms would become progressively worse. It
was always possible to extrapolate from the line
1825—1836—1847 and end up with the theory of
catastrophe worked out by Marx. In fact, even the crisis of
1857 still fitted into the picture. We know from their
correspondence how both Marx and Engels saw in the
breakdown of the boom in 1857 ... a vindication of their
theory of crisis. (Sombart, 1927, p. 702)

According to Sombart the crisis of 1857 was the last
great catastrophe of the classic type that Britain would go
through. Germany and Austria had still to go through their
own crisis in 1873. After that

Europe’s economic life was
underpinned by a conscious drive to neutralise, mitigate
and abolish the tensions; this was a tendency that
persisted down to the War and nothing in the War itself or
the years that followed it at all weakened or transformed
this tendency ... What emerged out of capitalism ... was
the very opposite of the prophesised sharpening of crises;
it was their elimination, or, ‘cyclical
stability’ as people have been saying more recently.
(p. 702)

The one-sidedness of this description is shown by the
facts. Bourgeois economists prefer to convince themselves
more than others that we are through with crises. Sombart
assures us that we have not seen a serious crisis in Europe
since 1873. But we know that the French crash of 1882 is
reckoned among ‘the most serious crises in French
economic history’ (Mehrens, 1911, p. 197) and that it
precipitated a depression that was destined to persist for
over one and a half decades. According to Sombart, in
Britain ‘the full savagery of unbridled capitalism
burst forth really for the last time in the 1840s ...
Already in the 1850s the drive for expansion was much
weaker and therefore also the setback’ (1927, p.
703). The facts prove the opposite. The crisis of 1895 was
preceded by intense speculation chiefly in South African
gold shares:

The real boom started only in 1895 ...
Of
all the attacks of pure speculative frenzy which the City
has lived through, this was the worst, the wildest and the
most pernicious. While it raged, more money was won and
lost than in half a dozen earlier booms and panics. It
ruined ten times as many people as the South Seas swindle
and undoubtedly played its part in bringing forth the Boor
War. (Financial Times, cited Weber, 1915, p.
270)

Commentators have tried to explain the novel character
of crises by saying that the banks have succeeded in
imposing regulation over economic life:

They can systematically withhold credit
and stop capital issues, where claims are economically
unsound. And in this way they can ensure that the creation
of capital takes a rational form ... They can thereby
prevent speculation on the exchange and moderate the over
optimism of industry itself. (Feiler, 1914, p. 168)

The fact that the character of crises has changed is
traced back to increasing planning and conscious regulation
of the economy. Changes that are rooted in complex causes
are interpreted as the achievements of bankers.

The worst orgies of speculation are possible in a period
when, with the transition from individual forms of property
to its social form in share capital, enormous fortunes
accumulated over several decades are thrown on to the
market and sacrificed on the stock exchange. These are the
flotation periods bound up with vast regroupments and
concentration of wealth. They are therefore periods of wild
speculation. But once this process of concentration of
share capital has already reached an advanced level, with
the general progress of accumulation and through the
mediation of the stock exchange, the exchange itself is
left only with the residual stock capital in the hands of
the public. Under these conditions speculation is badly
debilitated, not of course through the conscious
intervention of banks which supposedly centralise command
over the economy into their own hands, but because there is
not enough material for the exchange to digest. At an
already advanced level of concentration of share capital,
speculation on the stock exchange is bound to lose its
impetus as its middle-class base of small rentiers,
workers, civil servants and so on, dries up.

Yet this only compels the idle money capital to rush
into other outlets, into export of capital, as the only
investments promising greater returns.

This alone is one reason why world market struggles for
investment outlets become increasingly sharper.

This brings us to the second reason why the character of
crises in Britain has temporarily changed. As long as our
attention is fixed on an isolated capitalism it follows
that advanced stages of accumulation will necessarily
generate crises in their sharpest and most savage
forms.

During the first 50 years after 1825 when British
relations with world economy were still only embryonic, and
Britain could thus be regarded to some extent as an
isolated capitalism, the crises of capital accumulation
were enough to precipitate wild panics and collapses. But
the more Britain succeeded in building relations with world
economy, expanding foreign trade and discovering foreign
outlets for overaccumulated capital, the more the character
of those crises changed. But with the progress of
accumulation the number of countries grows in which
accumulation approaches absolute limits. If Britain and
France were the world’s first bankers, today the list
includes America — as well as a whole series of small
donor countries like Belgium, Switzerland, Holland,
Sweden.

Germany’s capital imports are a purely temporary
phenomenon. Given the technologically advanced structure of
German industry, high productivity of labour and very low
wages, the rate of surplus value is extremely high.
Therefore the tempo of accumulation is much faster so that
Germany will reimburse her foreign debts sooner than people
imagine and emerge on the world market as an exporter of
capital. Yet in proportion to the growth in the number of
countries which export capital, competition and the
struggle for profitable outlets is bound to intensify. The
repercussions of this will necessarily sharpen the crisis
at home. If the early crises of capitalism could already
lead to wild outbreaks, we can imagine what crises will be
like under the growing weight of accumulation when the
capital exporting countries are compelled to wage the
sharpest struggles for investment outlets on the world
market.

B Harms forecasts that the USA is already approaching
the absolute limits of accumulation, so that ‘the
capital which flows into the USA by way of interest
payments over the coming decades, must in some form find
its way back into the world markets’ (1928, p. 8).
This will promote the further industrialisation of the
newcomers. But this process of industrialisation,
encouraged by American capital, can only revolutionise
European exports. In future only means of production can be
exported. Yet the development of American industry is
driving the US in the same direction:

In other words we have to reckon with
the
fact that soon the USA itself will be emerging as one of
the world’s biggest suppliers of the means of
production. The well known enquiries of the Balfour Report
and the proceedings of the last ‘Imperial
Conference’ have produced instructive evidence for
such an assumption. (Harms, p. 8)

Should the USA start exporting means of production,
‘this must ultimately lead to a situation where the
European debtor countries simply cannot sustain debt
servicing charges to the US’ (Harms, p. 8) and cannot
pay for their imports of raw materials and means of
subsistence. In other words Harms foresees the approach of
one of the most terrible crises involving the bankruptcy of
European capitalism - although he consoles himself with the
illusion that the USA will voluntarily refrain from capital
goods exports so as not to smash completely the solvency of
her European debtors.

This makes it possible, finally, to form some more
adequate picture of the relation of banking capital, or
finance capital as Hilferding calls it, to industrial
capital. It is well known that Hilferding sees the basic
characteristic of modern capitalism in the dominance of
finance capital over industry. He argues that with the
growing concentration of banking, the banks increasingly
come to control capital invested in industry. As capitalism
develops, more and more money is mobilised from the
unproductive classes and placed at the disposal of
industrialists by the banks. Control over this money, which
is indispensable to industry, is vested in the banks. So as
capitalism develops and with it the credit system, industry
becomes increasingly dependent on banking. An
ever-increasing proportion of capital in industry is
finance capital: it belongs to the banks and not to the
industrialists who use it. With the growing concentration
of money and banking capital the ‘power of the banks
increases and they become the founders and eventually
rulers of industry’ (Hilferding, 1981, p. 226). As
banking itself develops:

there is a growing tendency to eliminate
competition among the banks themselves, and on the other
side, to concentrate all capital in the form of money
capital, and to make it available to producers only through
the banks. If this trend were to continue, it would finally
result in a single bank or a group of banks establishing
control over the entire money capital. Such a
‘central bank’ would then exercise control over
social production as a whole. (p. 180)

Hilferding needed this construction of a ‘central
bank’ to ensure a painless, peaceful road to
socialism. As we have seen already, Hilferding imagines
that the socialising function of finance capital can
facilitate the overcoming of capitalism.

Hilferding’s exposition contradicts the actual
tendencies of development of capitalism. It is also
incompatible with the fundamental ideas of Marx’s
theory. For if Hilferding were right in arguing that the
banks dominate industry, this would only shatter
Marx’s theory of the crucial importance of production
itself to the structure of capitalism. The crucial role
would then be played not by the productive process but by
finance capital, or structures in the sphere of
circulation.

Given the law of accumulation that we have developed, it
follows that the interrelations of banking and industrial
capital are historically changeable. We have to distinguish
three phases. At a low stage of capital accumulation, when
prospects for expansion are unlimited, the capital
formation of industry itself is not enough. Therefore
industry relies on a flow of credits from the outside, from
non-industrial strata. The building of a credit system
centralises the dispersed particles of capital and the
banks acquire enormous power as mediators and donors of
industrial credit. This was the phase France passed through
after 1850 and which came to a close in Germany at the
start of the present century.

The further progress of accumulation alters the
interrelation of banks and industry. In France the initial
capital shortage passed over into a chronic superfluity of
money. In this phase industry establishes its independence.
Obviously the specific configuration depends on the given
country and the given sphere of industry. As far as German
large-scale industry is concerned, Weber could write:

On the whole, there is no basis for the
widespread fear that industry, and especially large-scale
industry, is managed according to the wishes of bank
directors; on the contrary, the movement of concentration
and the formation of industry associations has made
industry far more independent of the banks. (1915, p.
343)

At more advanced stages of accumulation industry becomes
increasingly more independent of credit flow because it
shifts to self-financing through depreciation and reserves.
For instance Feiler cites the example of the Bochumer
Verein (by no means one of the industrial giants) which,
with an initial share capital of 30 million marks, within
nine years declared dividends equal to the entire nominal
value of the share capital, and simultaneously earmarked 40
million marks for new investments (1914, p. 112). Nachimson
has shown that over the period from 1907—8 to
1913-14, the share capital controlled by the German
industrial finance corporations declined from 29 per cent
of the total capital of all joint stock companies to 26.8
per cent. In the same period their foreign holdings
declined from 90 per cent of the total liabilities of all
stock companies to almost half. He concludes, ‘These
figures strongly suggest that the role of banks has
declined in importance’ (1922, p. 85). Although
Nachimson accepts Hilferding’s theory of the
domination of industry by the banks, he says:

However it is important to point out
compared with the start of the twentieth century, there has
been a distinct tendency for industry to become independent
of the banks ... Whereas the banks rely on external capital
flows which are basically derived from industry, the equity
funds of the industrial companies have been rising
continuously ... Industrialists like Thyssen, Siemens,
Rathenau, Stinnes ... do not come from banking circles, but
from industrial circles and they are increasingly
dominating the banks, just as the banks once dominated
them. (p. 87)

Finally in a third phase industry finds it progressively
more difficult to secure a profitable investment, even of
its own resources, in the original enterprise. The latter
uses its profits to draw other industries into its sphere
of influence. This is the case with Standard Oil
Corporation according to R Liefmann’s account (1918,
p. 172). When the overaccumulated capital of a certain
industry finds scope for expanding into other industries
defined by the lower degree of accumulation, funds are
channelled into ‘the New York money market, where
they play a crucial role’ (p. 172). In countries like
Britain, France and especially the USA, it is simply not
possible to speak of industry being dependent on the banks.
On the contrary industry has recently been dominating the
banks. Apart from its own assets in banks, industry sets up
its own financial institutions precisely in order to secure
a profitable investment for its own surplus funds. In
Germany firms like AEG are not only independent of the
banks, they stand in a solid position in financial circles
due to their own massive bank accounts. In a chapter on
recent international trends in industrial financing T
Vogelstein (1914) points out that the typical balance sheet
of modern large-scale companies shows a completely
different picture from the past. There is a tendency for
the share of equity funds to increase at the expense of
borrowed funds, or for the company to acquire its own
assets in the banks. According to Vogelstein, this is one
of the reasons why banks have been turning to the stock
exchange by way of investments.

The historical tendency of capital is not the creation
of a central bank which dominates the whole economy through
a general cartel, but industrial concentration and growing
accumulation of capital leading to the final breakdown due
to overaccumulation.

Footnotes

1.
It is a sign of Bauer’s
misunderstanding of Marx’s method when he uses
this provisional, simplifying assumption of a
constant rate of surplus value of 100 per cent in
his analysis of reproduction, but forgets to modify
it later.

2.
Opponents of Marxism accept
Luxemburg’s critique with great jubilation
because it entails conceding the defective character
of Marx’s system on a crucial point.